Stienemarié Bonsma-Potgieter, CFP® – Financial Planner

Inheriting a living annuity often comes at a difficult time. You may be dealing with grief, family responsibilities, paperwork and important financial decisions all at once. It can feel overwhelming, especially when you are asked to choose what should happen to the money before you fully understand the consequences.

A living annuity is different from a normal inheritance. It is a retirement income product that belonged to the original policyholder, also called the annuitant. When that person passes away, the remaining value in the living annuity is paid to the nominated beneficiaries. As a named beneficiary, you usually have choices, and those choices can affect tax, income, investment risk and your long-term financial plan.

This is a decision that should not be rushed.

Understand your options

When you inherit a living annuity, you generally have three choices. You can take the benefit as a cash lump sum, transfer the benefit into a living annuity in your own name, or take part of the benefit in cash and transfer the balance.

Each option has different tax and planning consequences. The right answer depends on your personal needs, your current financial position, your income requirements and the financial history of the deceased annuitant.

Taking the benefit as cash

A cash lump sum can be useful. It may help you settle debt, cover immediate expenses, strengthen your emergency fund, pay for education costs or improve your overall financial position.

The important point is tax. When a beneficiary elects to take a living annuity death benefit as a cash lump sum, the tax is calculated according to the retirement lump sum tax rules, as published on the SARS webiste. Importantly, this calculation is based on the deceased annuitant’s retirement lump sum history, not the beneficiary’s personal tax position. Previous retirement lump sums, withdrawals and severance benefits taken by the deceased can affect the tax payable on the benefit.

It is also important to check whether the deceased had any excess, or previously non-deductible, retirement fund contributions. These can affect the tax calculation and should be considered before making a decision.

There is another important planning point. If you take the benefit in cash and reinvest it into a discretionary investment, that investment becomes part of your personal estate. This means it may be subject to estate duty, executor’s fees and the normal estate administration process when you pass away. A living annuity, by contrast, can be a useful estate planning tool because you can nominate beneficiaries on the policy, and the value can usually pass directly to them outside the estate administration process.

A cash lump sum may still be the right decision, but it should be made with the after-tax amount and future estate planning consequences clearly understood.

Transferring the benefit into a living annuity

You may choose to transfer the benefit into a living annuity in your own name. This can be a sensible option if you do not need all the money immediately and would prefer to preserve the capital for future income.

Where the benefit is transferred into a living annuity, the transfer itself is generally not taxed at that point. Tax applies only on the income you draw from the annuity. That income is taxed in your hands as part of your normal taxable income. You are required to draw an income between 2,5%-17,5% of the capital value of the annuity and this can be reviewed annually.

This needs careful planning because the income you draw from the inherited living annuity does not sit in isolation. It is added to your other income, such as salary, rental income, investment income or income from another annuity.

A living annuity also requires discipline. You will need to choose an income drawdown rate within the allowed limits, and drawing too much too soon can reduce the capital and place pressure on your future income.

The value of this option is that the money can remain invested and continue to serve a long-term purpose. It may become part of your retirement plan, provide a regular income stream, or help you preserve wealth for your own beneficiaries.

Taking a combination

Many beneficiaries choose a combination because it allows them to meet immediate needs while still preserving part of the inheritance.

This option can work well when there is a clear short-term need and a strong long-term planning goal. It may also help manage tax more carefully than taking the full benefit as cash.

The key is to compare the options before making the election. Consider the after-tax lump sum, the future income potential, the estate planning impact and the role this money should play in your broader financial plan.

You can choose the right provider for you

As a beneficiary, you do not necessarily have to keep the living annuity on the same platform or with the same insurer used by the original annuitant. You can review the available options and decide whether another provider, investment platform or investment strategy may be more appropriate for your needs.

This matters because fees, investment choice, service levels and income flexibility can differ from one provider to another. The original annuitant’s provider may have suited their needs, but your circumstances may be different.

You may also be able to transfer the living annuity again at a later stage through a Section 50 transfer, subject to the relevant rules and administrative requirements. This gives you flexibility, although the first decision should still be made carefully.

Update your own beneficiaries

Once the living annuity is in your name, you become the new policyholder. This means you should nominate your own beneficiaries.

This step is often overlooked. Your beneficiary nomination should reflect your current wishes and family circumstances. You may name a spouse, children, family members, a trust, or another appropriate beneficiary, depending on your estate planning needs and the provider’s rules.

It is also useful to consider secondary beneficiaries. A secondary beneficiary is someone who may receive the benefit if your primary beneficiary passes away before you, or if the primary nomination cannot take effect for some reason. This adds an extra layer of planning and can reduce uncertainty for your family.

Beneficiary nominations should be reviewed after major life events such as marriage, divorce, the birth of a child, the death of a loved one, changes in financial dependency, or a major change in your estate plan.

Get advice before you decide

A living annuity inheritance should be viewed as part of your full financial picture. Before making your election, consider how much cash you need immediately, whether you have expensive debt, what income you may need in future, and how the decision will affect your tax.

You should also consider the deceased annuitant’s retirement lump sum tax history, whether there were excess retirement fund contributions, and how the income from an inherited living annuity may affect your own taxable income. From there, the focus should move to investment risk, provider choice, platform fees and your own estate planning.

Good financial advice can help you compare the options, understand the tax, choose an appropriate investment strategy and structure the inheritance around your goals. A tax professional may also be needed where the deceased annuitant had a complex retirement history, previous lump sums, or excess contributions.

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