Living Annuity Tax: How Your Retirement Income Is Taxed in South Africa

A living annuity will provide you with flexibility in how much retirement income you withdraw from your capital, but it’s important to consider tax as well. You will want to evaluate how much you will receive after tax, rather than focusing on the amount before tax deductions. This will give you a more accurate picture of the final amount you will have in your pocket.

In this article, we’ll take a closer look at how your living annuity is taxed, multiple income sources, PAYE, beneficiaries, fees, fund selection and annual reviews, as well as how 10X can support investors.

What is a living annuity and what is living annuity income?

A living annuity is a flexible investment product that you use after retirement. It will be funded by your retirement savings from your retirement vehicle, such as your retirement annuity or preservation fund. Your annuity will allow you to keep your capital invested in the market while you draw an income from this capital. You will choose both your drawdown rate and the underlying funds in which your capital will be invested.

You can select a drawdown rate between 2.5% and 17.5%. This drawdown rate is the total percentage of your annuity that you will draw as an income each year. You can amend this rate each year at your policy anniversary date. A drawdown rate of 4% is generally considered sustainable by industry professionals, but nothing can be guaranteed. You will also be able to select the frequency at which you will receive your income payments. This may be annually, bi-annually, quarterly or monthly, depending on how you like to manage your income.

When you are considering your drawdown rate and income, you should also consider the tax you will pay on this income and how much income you will receive after tax deductions. There won’t be tax on the growth within your annuity.

As an investor, you should consider the ‘golden equation’ when it comes to managing your living annuity income. It is as follows: Drawdown rate + fees + inflation ≤ investment returns

This equation emphasises the importance of keeping the sum of your drawdown rate, fees, and inflation below your investment returns. This is a useful guideline when managing your annuity, but it should not be seen as a guarantee.

PAYE on living annuity income

Tax is paid on the income that you draw from your living annuity. This tax is pay-as-you-earn (PAYE) tax. Drawing less income from your annuity may mean you pay less tax overall, depending on your current tax bracket. It’s important to remember that your tax rate is determined by your total income, not just your annuity income.

This is why it is useful to think about your annuity income as part of your broader retirement income picture. The income you draw from your annuity may be only one part of your total taxable income, and the amount withheld for PAYE may not always reflect your final tax position for the year.

This will include income that you may receive from other sources. For example, you may have a living annuity as well as a government pension. This may place you in a higher tax bracket, which may affect the total tax you end up paying.

Other income sources may include rental income, interest income, part-time work, another annuity or income from discretionary investments. If your total income changes during the year, your tax position may also change. This makes it important to review your drawdown rate, income needs and tax position regularly, especially before your annual policy anniversary date.

Why your age and tax threshold matter

Tax thresholds are also impacted by your age. SARS adjusts the minimum income tax thresholds by age.

For 1 March 2026 to 28 February 2027, SARS lists the following tax thresholds on their website: R99,000 for taxpayers under 65, R153,250 for taxpayers aged 65 -74, and R171,300 for taxpayers aged 75 and older. These thresholds are important to note, as both your age and tax threshold will be key in determining how much tax you will pay.

This means that two retirees drawing the same living annuity income may not necessarily have the same tax outcome if they fall into different age categories or have different additional income sources. Your age, total taxable income and applicable rebates can all affect the amount of PAYE that may be deducted from your annuity income.

As mentioned above, when you are considering your annuity and drawdown rate, it’s important to take into account all of your sources of income, not just your annuity.

This is especially important if you also receive income from another pension, rental property, interest-bearing investments, part-time work or a discretionary investment portfolio. Looking at your full income picture can help you make a more informed decision about your drawdown rate and avoid being surprised by your overall tax position at the end of the tax year.

Beneficiaries and tax considerations

It’s vital to nominate beneficiaries when setting up your annuity, as they may receive the money when you die. They may also be able to pass any remaining value in the living annuity on to their own nominated beneficiaries. Review and update your beneficiaries regularly to ensure they still reflect your wishes, especially after major life events such as marriage, death or divorce.

If you do not have a nominated beneficiary or beneficiaries, then any remaining annuity capital may go to your deceased estate, which will then be paid out according to your testamentary wishes. This could be a long and expensive process. By ensuring you have nominated beneficiaries for your annuity, you can make certain it will not be subject to estate duty. Estate duty is levied at 20% on estates valued up to R30 million and 25% on estates valued at more than R30 million.

The importance of fees in your living annuity

Fees are important when it comes to your living annuity, as they may reduce the returns available to reinvest. You would look to minimise fees as far as possible so that you have potentially more returns available to grow and compound over the long term.

Let’s have a look at an example illustrating the effect of fees. We will assume the following information for our example:

• Starting capital: R3 million
• Investment period: 25 years
• Gross annual return: 10%
• Inflation rate: 5% per annum
• Annual drawdown rate: 4% of the opening value each year

0.86% Fees: After 25 years, the annuity would have an estimated inflation-adjusted value of R3.19 million.

3% Fees: After 25 years, the annuity would have an estimated inflation-adjusted value of R1.87 million.

Just a small difference in fees can lead to much more significant differences in retirement outcomes. This example is for illustrative purposes only and real results may vary. Feel free to learn more about the effects of higher fees in this article.

• TER (Total Expense Ratio): This refers to the ongoing expenses within an investment fund. It is a useful way to compare the operating costs of similar funds.
• TIC (Total Investment Charge): This is the total investment charge, which combines the TER with transaction costs within the fund. This can be used to calculate the total cost of the investment fund.
• EAC (Effective Annual Cost): An annualised estimate of the impact of product, investment management advice, administration fees, and all other applicable charges.

The Effective Annual Cost gives investors a standardised way to understand the total cost of holding an investment over time. Introduced by ASISA, the EAC brings together the various charges associated with an investment into a single annual percentage. Depending on the product, these may include investment management fees, administration costs, advice fees, penalties, guarantees and the impact of loyalty bonuses. This makes it easier for investors to compare the cost structures of different products and providers on a consistent basis.

Here are a few of the typical fees that you may see charged:

• Advisor fees: If you have an advisor, they will charge fees for the advice and any other services that they offer you.
• Administration fees: There will be administration fees related to the fund for tasks like compliance, reporting, tax and more.
• Management fees: The fees associated with the running and management of the fund.

At 10X, you can expect to find fees that are simple, transparent and cost-effective. Please view our living annuity information page to find out more on the fees charged on living annuities. Fees on retirement products are usually less than 1%, depending on the product and the amount invested.

Fund selection in your living annuity

As is evident from the research by Brinson, Singer, and Beebower, your fund selection can be an important determinant in the growth of your annuity over time. When you are selecting your asset allocation, you will usually include a mix of asset classes, namely equities, real estate, bonds, and cash.

You would look to include equities in your portfolio for potential long-term capital growth and returns that may beat inflation. Equities may also experience significant market declines along with this. You may find fluctuations over shorter periods, so you may find equities more suitable for you if you are looking at a long-term investment timeline. Equities have historically delivered returns above inflation by approximately 7% annually over long periods (based on JSE All Share Index performance versus CPI from 1960-2020).

Real estate may contribute to long-term portfolio growth. Listed property can, however, be volatile and may be affected by factors such as interest rates, economic conditions and any changes in the property market. Real estate may serve as a good hedge against inflation.

Bonds can provide your portfolio with income, diversification, and some stability. They are usually less volatile than equities. Bond values may be affected by changes in interest rates and/or inflation expectations. Bonds are generally seen as more conservative, but they may produce some good returns.

Cash is usually considered to be the most liquid and stable of the asset classes. It is unlikely to be as volatile as equities or real estate. Cash returns may take strain keeping up with inflation, which may have an impact on purchasing power.

You may also consider some offshore exposure in your portfolio. Living annuities are not subject to Regulation 28, so there are no restrictions on your equity and offshore allocations. Including some offshore exposure in your portfolio may give you greater access to the larger international market.

Our funds at 10X are well-diversified across the asset classes, so you can select a fund that best matches your investor profile, long-term financial plan, and goals. Please visit our fund information page to find out more about our available funds.

Tax should form part of your annual review

You would want to review your annuity annually, prior to your policy anniversary date in order to be in time to implement any changes to your drawdown rate for the next year. Reviewing your taxes should also be part of this review. Along with your drawdown rate and tax, you would also want to review your fund selection, fees, investment performance and beneficiary nominations.

Your policy anniversary review is a useful opportunity to look at your annuity as a complete retirement income plan, rather than only focusing on the income amount you want to draw. If your taxable income has changed during the year, or if you expect it to change in the year ahead, this may influence how much PAYE is deducted and how sustainable your chosen drawdown rate feels in practice. Let’s have a look at some questions to consider that are more tax-specific:

1. Is your total taxable income still the same?
2. Have you had any changes to your income sources?
3. Has your tax threshold age changed?
4. Will you be changing your drawdown rate?
5. If so, how will this affect your total tax?

You may also want to consider whether any changes to your annuity income could affect your broader retirement budget. For example, increasing your drawdown may provide more income in the short term, but it could also increase your taxable income and place additional pressure on your remaining capital. Reviewing tax, income, fees and investment performance together can help you make a more informed decision before the next policy year begins.

How 10X can support investors

At 10X, we offer investors a transparent, low-cost and simple fee structure which makes it easy for you to both see and understand the fees which you are being charged. You also have access to a range of well-diversified funds, allowing you to find a fund that suits your needs and long-term financial goals. You may also like to use our free online tools, which are on offer on our website. The Living Annuity Calculator is a useful tool should you like to do some scenario planning, while our EAC Calculator allows you to compare different service providers and fees.

If you have any queries surrounding your living annuity, you are able to contact the 10X investment consultants at no additional cost. Our consultants are experienced, knowledgeable and ready to assist with any queries you may have, so don’t wait to get in touch.

Final thoughts on living annuity tax

A living annuity offers great flexibility in your retirement years, but it’s important to consider the tax implications of your income draw, as this can affect the retirement income you receive. You should consider your age, tax threshold, all income sources and PAYE. You should also not neglect your beneficiary nominations, fund selection and fees, and ensure these are part of your annual living annuity review.

Always keep a close eye on your taxes, and should you need any guidance, feel free to contact the helpful 10X investment consultants, who are ready to assist wherever possible. Get in touch with 10X today to discuss living annuity opportunities.