Know living annuity rules

A Moneyweb reader asked: Would the value of a living annuity be included in the calculation of executors’ fees in winding up an estate? If so, how would this be calculated? (Not a guaranteed annuity).

Gareth Collier, a certified financial planner at Crue Invest, answered:

A feature of a living annuity is the ability to nominate beneficiaries, Adding safeguarding the remaining capital for your heirs. The nominated beneficiary or beneficiaries need not be financially dependent on yourself in order to qualify.

For the purposes of answering this question, we have assumed that the nominated beneficiary is a natural person. In the event of your death, the funds in your living annuity will go directly to your beneficiary and will not form part of your deceased estate.

As such, your living annuity funds will not attract estate duty or capital gains tax, and will not be subject to executors’ fees. This is because living annuities are member-owned funds and are  therefore not regulated by Section 37C of the Pension Funds Act.

The beneficiary of a living annuity must decide how they would like to take the proceeds of the investment. They can elect to take the full value as a lump sum, although this will be subject to tax on the retirement withdrawal table. They can also choose to transfer the proceeds to another living annuity in their name. Finally, they may choose to take a combination of a lump-sum withdrawal and a compulsory annuity.

Keep in mind that any tax liability initiated from the cash withdrawal is taxed in  the hands of the deceased estate as per the retirement tax table. This means any cash lump sum portion the  deceased received from their retirement funds in their lifetime will be included in this calculation.

As such, any cash withdrawals they make are subject to the retirement tax table.

Where the nominated beneficiary is not a natural person, for instance, a trust, the lump sum amount will be paid to the trust. This cash lump will be subject to tax as per the above tax table in the deceased estate.

The only instance where executors’ fees may be charged is where no beneficiary is nominated to the living annuity.

In such an instance, the proceeds of the annuity will be paid into the deceased’s estate and, while no estate duty will be charged, the executor reserves the right to charge a fee on the capital value of the funds as they will form part of the winding-up process.

The capital value paid into your estate is simply the market value of your investment less any fees and charges.

Also bear in mind that the proceeds and income from a living annuity do not fall within the definition of “pension interest” as defined by the Divorce Act, and therefore no claim can be brought  against the capital value of a living annuity in the event of divorce or death.