Understanding Annuities in South Africa
Annuities provide a steady source of income once you stop working and play a crucial role in retirement planning. Read our retirement annuity guide to learn more.
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An annuity is a powerful product that provides a steady income stream during your golden years.
In South Africa, annuities can play an essential role in providing financial stability when you stop working.
This guide will walk you through retirement annuities in South Africa and the different types and highlight key considerations to help you make a more informed decision.
Understanding retirement annuities
An annuity is a product designed to provide you with regular income for life. These products can form part of your wider retirement planning strategy.
You contribute funds to the annuity, either as a lump sum or over time, and the insurance company invests it on your behalf. In return, you receive periodic payments that can provide financial security when you retire.
Those with pensions or provident funds are legally required to purchase an annuity. While you can take one-third of your retirement savings as a lump sum, the remaining two-thirds is paid as an annuity.
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Types of annuities
There are two common types of annuities in South Africa: life and living annuities. Both are widely used in retirement planning but serve different purposes and have unique benefits and considerations.
Living annuities
A living annuity is an investment product that provides flexibility. With this type of annuity, you can have more control over your investment choices and withdrawal rates.
You can adjust your annual income within set limits. As of 2024, the South African Revenue Service (SARS) has set the minimum drawdown rate to 2.5%, while the maximum is 17.5% of the investment's value.
Living annuities remain invested in the market, so your income depends on the performance of these investments.
Pros
- Flexibility in income withdrawals and investment choices
- Upon death, the remaining funds go to your beneficiaries
Cons
- Poor investment performance could affect your income
- Requires careful management to avoid running out of money
Life annuities
Unlike a living annuity, a life annuity is an insurance product. They provide a guaranteed income for life, regardless of market conditions. Your retirement savings are transferred to an insurer that guarantees payments for the rest of your life.
With a life annuity, you have less flexibility than a living annuity but added security.
Pros
- Guarantees a steady income for life, reducing the risk of outliving your retirement funds
- There is no need to actively manage investments
Cons
- There is little to no flexibility in adjusting income
- Typically, no residual funds are left for beneficiaries after death unless a specific guarantee period is purchased
Tax considerations for annuities in South Africa
Adding funds to an annuity can offer several tax benefits.
Contributions to retirement annuities are tax-deductible up to 27.5% of your income. The annual cap as of 2024 is R350,000. Also, the money you invest enjoys tax-free growth.
However, lump-sum withdrawals are subject to tax on a cumulative basis as follows:
- 1 – 550,000: 0% of taxable income
- 550,001 – 770,000: 18% of taxable income above 550 000
- 770,001 – 1,155,000: 39 600 + 27% of taxable income above 770,000
- 1,155 001 and above: 143,550 + 36% of taxable income above 1,155,000
While you don't pay income tax on the money you save, you do when you start drawing an income from the annuity. Annuity payments are treated as regular income, meaning they are subject to income tax at the standard income tax rates (18% to 45%).
Annuities in retirement planning
Annuities can be a valuable part of a balanced retirement plan. They can provide lifetime income security, help guard against outliving your savings, and give you peace of mind.
You can diversify your retirement income by including annuities in your portfolio. They also offer the added benefit of saving in a tax-efficient way.
Speak to a financial adviser to explore if an annuity aligns with your goals and the benefits they offer.
Holborn Africa is a leading, award-winning financial service provider. We offer a wide range of tailored retirement planning services to meet your needs and help you reach your goals.
Book a free, no-obligation meeting to learn how we can help you.
Frequently Asked Questions
A retirement annuity (RA) is a private retirement savings account. You contribute money, either as a lump sum or through regular payments, which are invested in various asset classes. Once you reach retirement age, one-third can be taken as a lump sum, while the remainder must be used to buy an annuity that pays monthly income.
