Know Your Money with Bronwyn Waner and Craig Finch
Know Your Money with Bronwyn Waner and Craig Finch
104. The Difference between a Life and a Living Annuity
Unlock the secrets to securing your financial future with us as we welcome the insightful Felicia from Allan Gray. Together, we break down the complexities of living annuities, ensuring you're well-equipped to manage your retirement income. With Felicia's expert guidance, discover the nuanced differences between life and living annuities, the critical role of drawdown rates, and the stringent withdrawal rules that could impact your plans. Whether you're pondering over managing multiple annuities or strategically planning your post-retirement income, this discussion promises to enlighten and inform.
Navigate the often-overlooked terrain of living annuities in the context of life's unexpected turns, such as divorce and beneficiary nominations. Felicia shares essential knowledge about nominating beneficiaries, unpacking the tax implications that come with opting for a lump sum or continuing with a drawdown. Prepare yourself for the complexities of annuity income division during divorce, and understand the tax responsibilities both parties bear. We also touch on how emigration can influence your annuity choices, ensuring you're armed with the knowledge to make informed financial decisions.
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Welcome to Know your Money, where we will explore our relationship with money and how the psychology of it impacts our financial decisions, as everyone thinks about money differently. In our podcast, we'll be presenting a variety of financial topics in an easy to understand way, which we hope will assist you with managing your money.
Speaker 2:Hi, I'm Craig Finch, co-owner of Growth Financial Planning, an independent financial planning practice, and I've been a financial planner since 1986.
Speaker 1:Hi everybody. I'm Bronwyn Wehner, co -owner of Growth Financial Planning. I'm a certified financial planner and our philosophy at our company is to grow yourself to grow your wealth.
Speaker 3:Hi everyone. My name is Warren Grimsley. I'm a director at Rogue Media and help facilitate this wonderful podcast. My main goal here is to try and understand what these two lovely people are saying, so that we can all understand.
Speaker 1:Hello everybody, welcome to Know your Money. Today, Felicia from Ellen Gray is joining us. Felicia has been there since 2021 and she's a legal advisor in the retail legal team at Ellen Gray. She holds a Bachelor of Law degree at the University of Cape Town and a postgraduate degree in financial planning from the University of Stellenbosch Business School. Felicia was admitted as the attorney of the High Court and obtained her right to appear in the High Court in 2018. So highly qualified.
Speaker 4:She's really smart, she's super smart, jeez.
Speaker 1:And we are privileged to have you here today and just unpack a few of the technical things. Thank you so, so much for being here. Thanks for having me.
Speaker 2:Nice to see you and nice to have you in the studio, Thank you. Thanks, Craig. We wanted to pick your brain around living annuities Just for our listeners. We did a podcast a while back on living annuities and just a summary of living annuities.
Speaker 2:Once you retire, you have an option of buying two types of annuities from a retirement annuity or a pension fund. You could buy a life annuity, which is another whole topic on its own, or a living annuity. A living annuity you choose how much income would you like from the living annuity between two and a half percent to 17 and a half percent of the capital, and the living annuity will pay as long as the money lasts. So it's a bit of a capital, and the living annuity will pay as long as the money lasts. So it's a bit of a different type to a life annuity.
Speaker 2:It's important to make sure your money lasts, but there are certain things that you can and can't do in a living annuity, I think. One thing I'd like to ask you, Felicia, is can I? I've now retired, my retirement annuity is transferred into my living annuity and I'm receiving my monthly pension and I decide I want to go and buy a business somewhere else and I need my money out. I've got a couple of million rand in my living annuity. Can I cash it out?
Speaker 5:Unfortunately not. There's a de minimis amount. So the de minimis amount currently is for 125,000. So only then would you be able to cash out. So if your living annuity was 125,000 Rand or less, would you then be able to withdraw Anything above that amount? You're unable to. You can only just continue obtaining your income.
Speaker 2:And if it is under 125,000, then it'll be taxed as well, correct?
Speaker 5:Yes, it's taxed on the retirement lump sum tax tables.
Speaker 2:Okay, so if you've taken your third or whatever, it will be part of that. If you've taken your 550,000, for example, or whatever you've taken. It just gets added to that. You get paid tax on that, depending where you sit in the table, correct? Yes, okay, so the rest you can't get. So I've got my 2 million in my living annuity and I'll say well, how do I get my money out?
Speaker 5:You can't. You can't get it out. You just have to continue obtaining your income and then, should the value of your living annuity fall under 125k, then you'd be able to make a withdrawal. Another thing that I actually want to mention, also with regards to being able to withdraw, is there is a limitation on the de minimis. So, for example, if you have multiple living annuities with one insurer and they're all, for example, maybe under 125K, it doesn't automatically mean that you'd be able to withdraw. So, for example, let's say one account is sitting on a 80,000 Rand balance. The second account maybe is on a no balance because you previously withdrew. Let's say that amount maybe was 60. And then you have a third one which has 40,000 Rand in it, and let's say you want to now withdraw the one that's for 40,000 Rand. So what will happen is we have to aggregate your present withdrawals with your past withdrawals and see if that comes up to 125,000. If it's above 125,000, you wouldn't be able to cash out that third one, even though it's actually below the demand.
Speaker 4:So effectively. It's a one time in your life withdrawal limit of 125,000 that's aggregated over your account.
Speaker 5:Effectively if you have multiple living annuities with one insurer.
Speaker 2:Okay, with one provider.
Speaker 5:Yeah, so it's per provider not.
Speaker 4:Okay, completely for all.
Speaker 5:Yeah, so it's per provider.
Speaker 1:And then also just back to the income. I think for people to understand, if you don't know what a living annuity is, the drawdown rates Maybe you can just explain how you know that income drawdown rate would be. So that two million Rand that you were referring to you can't just say, okay, I want this much every month.
Speaker 5:It has to fall within the drawdown rates yeah, so it has to fall within the specified drawdown rates, which are currently between anything between 2.5% to maximum 17.5% of your capital. So you can't, as you said, you can't decide.
Speaker 2:Oh, I want to earn anything that would be above 17.5 percent of your capital yeah, the quickest way to get the money out, if you need it, is to make a to draw down 17 and a half percent, but that means that you're going to pay a much higher rate of tax and your annuity will probably only last six years yeah, yeah.
Speaker 5:Yeah, you need to take that into account so that you don't deplete your capital.
Speaker 1:Yeah, do you have questions, warren?
Speaker 4:Why is the money locked in?
Speaker 2:Because human behavior People don't know. Well, if you got a lump sum of money, I mean is that a contractual thing with?
Speaker 4:the service provider. Is that a legal?
Speaker 3:thing, so it's a legal thing.
Speaker 5:So the capital effectively belongs to the insurer because it sits on the insurer's balance sheet and the client is then only contractually supposed to receive an income. So that's what they have a right to. They have a right to the income, but not a right to the capital Right. Okay.
Speaker 2:So throughout your lifetime of paying your retirement annuity, you're getting a tax deduction for it, and then the incentive is to build up capital for your retirement. But now getting into retirement, another incentive is not to spend that money in one foul swoop is to make sure you get a monthly pension, and that's why they force you to get a monthly pension, so you don't just blow it.
Speaker 3:Oh, that makes sense.
Speaker 2:Which is much better for everybody.
Speaker 4:Yeah.
Speaker 1:And remember we did that episode on two pots. So that's where the legislation's definitely changing. So everybody's two thirds going forward is going to be locked into a living annuity type of thing. Annuity type of thing, so that it's like you stop working but you still want to earn a salary and an income. So this is providing for that. So people stop working and then cash out all this money and think, oh my gosh, I have 2 million Rand, which seems like a lot of money it's not, but from an income perspective it's not actually long and inflation. So this is just making sure that people can still sustain their lifestyles relative to before they stopped working.
Speaker 4:And just for me, because you know I don't really understand what happens when you die.
Speaker 5:So when you, at inception of the living annuity policy, you are recommended, advised, to nominate beneficiaries on that living annuity, so when you die, your beneficiaries will then obtain the proceeds of that policy. And you can nominate natural persons, you can nominate trusts, you can nominate an entity, but if you nominate anybody else other than a natural person or a South African registered trust, those people or let me rather say that entity will have to obtain they obtain a cash lump sum.
Speaker 4:Right, whereas the South Africans or South African trusts or sorry, a person or South African trusts would be able to get a drawdown.
Speaker 5:Yes, they have the option to get a cash or open a new living annuity in their own name, or a combination of both.
Speaker 2:So you could receive a living annuity from your parents and it's an annuity that you're under 55 years old, because your RA, when you're a retirement annuity over 55, you have to buy an annuity with two-thirds of it. So you could be a 40-year-old and still getting a living annuity, but from your parents' estate.
Speaker 5:Yeah Right, okay, it was a death benefit.
Speaker 2:So then, in that case you don't have to cash it out. You can continue getting the money every month your monthly income.
Speaker 1:And then in terms of the tax of that. So now the beneficiary, or maybe we must do a whole episode?
Speaker 2:on that, I guess yeah, I'll do that.
Speaker 1:The taxes on that beneficiary. So now, if they start earning the income, they're taxed in their own name, because now they open a living annuity in their own name. And then the lump sum. If they chose to go with the lump sum route, does the person who passed away pay the tax?
Speaker 2:or does the yes?
Speaker 1:it's the person who passes away. So it's those things you have to think about.
Speaker 2:So I can't cash it out unless it's under the 125. I can't if somebody passes away. It can pay out as a lump sum, but there's tax implications. What happens if somebody gets divorced? So yeah, and they're both husband and wife are receiving the pension proceeds from this hard-earned living annuity that's gone for 30 years. What happens then?
Speaker 5:Yeah. So with divorce where living annuities are concerned, it's important to just remember that the treatment is different from retirement benefits, because with retirement benefits there's something called pension interest and the non-member spouse in that instance is able to obtain a cash lump sum from that retirement benefit. But it's different with living annuities because, as I said, the capital doesn't belong to the policyholder. So the policyholder only has a right to receive the annuity income. So the courts have ruled and said that what happens on divorce is that the annuitant, the policyholder, as they have a right to receive the annuity income, that income then should form part of the divorce proceedings.
Speaker 4:So the parties have to decide how to then split that annuity income Depending on how they were married, I suppose.
Speaker 5:Yes, of course, depending on how they were married so in community of property or out of community of property with accrual then that would be able to happen. What's interesting, though, is that currently we don't really know how exactly to calculate this right to the future annuity income, because that's what it all boils down to is actually, how much should the non-member spouse then obtain? And currently we don't know, because the courts haven't really given a direction in that sense, but some people have like advised that you know there's a specific way in order to calculate it, but the thing with this is there's a lot of there's more questions than answers when it comes to this, because, number one, the annuitant can choose a lot of there's more questions than answers when it comes to this Because, number one, the annuitant can choose a drawdown right, and they can choose to change that drawdown, and then also, they choose the specific funds or portfolios that they want to invest in, and returns are different on different funds. So all of those things need to be taken into account.
Speaker 2:So the primary product stays the living annuity and then the spouse who's entitled to some of those. Things need to be taken into account. So the primary product stays the living annuity and then the spouse who's entitled to some of those, the income out of it. They may want to make changes on the primary, on the living annuity.
Speaker 5:No, so the spouse who's not owning the living annuity can't give a direction as to how to change it. What we normally advise our clients when they're in divorce proceedings is to, if by agreement of course, in the divorce order to put it down that the policyholder can't change the drawdown without consent of the other spouse. So in that way they sort of have a little bit of control with regards to how much they may be earning.
Speaker 2:But the court would have ruled that X amount must be paid out of that living annuity to the spouse. Yes, so for example, and you at Ellen Gray will split it like that X amount in a percentage not a rand, not a rand value.
Speaker 5:So the divorce order would say 50% of the annuity. For example, 50% of the annuity income must be paid to the spouse.
Speaker 4:And as far as tax goes, in a situation where there's a divorce, the tax is paid as its income to the person receiving it, so the person who holds the policy. Are they paying the tax and then sharing post-tax?
Speaker 5:Yes, they are paying the tax, and then the person who's not holding the policy. They get that money after tax, after tax.
Speaker 4:And would they then have to put that as part of their tax return that they're receiving those funds? They would have to. Yes, Even though the tax has been paid on them.
Speaker 5:Yeah, because it's an income. Okay, it's an income at the end of the day, even though they're not paying the tax for that income.
Speaker 2:Right, okay, yeah. So the last is that if you immigrate or leave the country, can you cash it out.
Speaker 1:Sorry, I just wanted to ask back on that one before we go to immigration. Does Ellen Gray pay each of the spouses or does it get paid to the one spouse and they must pay the other spouse for that 50%?
Speaker 5:It depends on the divorce order and how it's worded. So if the divorce order cites Alan Gray Life Limited and says that Alan Gray Life Limited should split 50% of the annuity income, then we would be able to facilitate that payment to the non-member spouse. But sometimes the divorce-member spouse but sometimes the divorce order doesn't, and so we then leave it. It's then up to the policyholder for them to then pay the non-member spouse directly.
Speaker 2:But it's better to have it like that for both parties, and then the tax will be taxed accordingly, right?
Speaker 5:Yes, the policyholder always pays the tax.
Speaker 2:Oh, the policyholder always pays the tax?
Speaker 1:Yeah, okay, awesome. Should we do the immigration now?
Speaker 2:Yeah I just want to ask about can you cash it out? Oh so, when you seize tax residency, If you leave South?
Speaker 5:Africa, yeah. So no, you can't cash it out, of course, unless if it's below the de minimis, then of course you can cash it out, but no, you can't. So you just continue earning that income, either in your foreign bank account, depending on if you have seized tax residency, and then, of course, if you, example, are a South African who's temporarily abroad, if you provide us with those documents to prove that you are temporarily abroad, then we can also facilitate the income into your foreign bank account. I just want to say one thing, though, on that is that we prefer to then have the annuitant have the frequency to be annual on foreign payments because there's obviously a charge for BOP payments.
Speaker 2:So bottom line, Warren, you can't cash it out. It's there for your future pension. That's in most cases.
Speaker 4:That's what I'm getting. Yeah, yeah, yeah, yeah.
Speaker 2:Okay.
Speaker 1:All right, okay, awesome. I think we touched base and that was a great one.
Speaker 2:Yeah, how important it is that you preserve your money for retirement in this scenario.
Speaker 1:Thank you so much.
Speaker 2:Thanks, huy, see you next time.
Speaker 1:Thanks Huw, See you next time.
Speaker 2:Thanks guys, Thank you. Thank you for listening. If you have enjoyed this podcast or would like to subscribe, please visit our website, wwwgrowthfpcoza. The information we have provided in this podcast is our personal opinion. For more detailed information, please discuss your financial situation with a financial planner.