The tax implications of Living Annuities when it comes to estate planning

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A living annuity is a post retirement product. It is what may be bought with the compulsory savings that have been accumulated with the view to providing a passive income on retirement and until death. The idea behind a compulsory annuity is that it should provide an income for the annuitant until his death. There is no guarantee, however, that this income will be sufficient to maintain his desired standard of living.

Living annuities have gained in popularity not only because they provide greater flexibility than the traditional life annuity when it comes to the income received as well as the potential investment returns that could be earned, but also because they are seen as fulfilling a dual role: firstly to provide income on retirement and secondly to provide a legacy after the death of the annuitant. The remaining capital is available to the nominated beneficiary/ies either as a taxable lump sum, or as taxable annuity income or a combination of both.

There are two taxes that can potentially apply on the death of the annuitant, namely income tax and estate duty.

  •  If the beneficiary/ies elect to take the benefit as a lump sum, the taxable lump sum will be taxed in the deceased’s hands in accordance with the retirement tax table.
  • If the beneficiary/ies elect to receive an annuity instead of a lump sum, the benefit will be transferred tax free into an annuity contract in the beneficiary’s name. The income received from this annuity will attract income tax, which will be deducted by the administrator and the after tax income will be paid to the beneficiary. A tax certificate will be issued at the end of the tax year.

All benefits received from an approved fund, or compulsory life annuity (including a living annuity) are exempt from estate duty, except for anyremaining non-deductible contributions, which were made after 1 March 2015 and which will be brought into the deceased’s estate duty calculation as property.

While a living annuity certainly may contribute to a person’s estate planning, it should be kept in mind that it remains predominantly a post retirement product. The aim is to provide the annuitant with an income that enables him to enjoy a reasonable standard of living upon retirement. The fact that if there is anything left on the death of the annuitant, this benefit that can be bequeathed to a beneficiary is incidental to the product and should not be the sole deciding factor when a client elects to invest in a living annuity.

Not Legal or Financial Advice
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