Temporary relief for pensioners with living annuities – Pros and cons to consider

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“…we have expanded access to living annuity funds by allowing (the) individual to adjust the proportion they receive as an annuity income, instead of waiting up to one year until their next contract anniversary date,” Minister of Finance Mr Tito Mboweni remarked at the media briefing to outline the R500 billion economic support package. According to a Business Day report, the Treasury is proposing changing the law governing living annuities to help retired people who are experiencing cash-flow problems due to the Covid-19 pandemic.

“Currently, those with a living annuity are only entitled to change their withdrawal rate once a year on the anniversary date of the policy and are limited to withdrawals at the lowest limit of 2.5% of the capital amount and at an upper limit of 17.5%,” the report clarifies. As a result of the announcement,the once-a-year change rule will be amended to allow policy holders to make changes immediately. The lower withdrawal limit of 2.5% will be lowered to 0.5% and the upper withdrawal limit to 20% to allow policyholders to withdraw a greater amount. On a R10m capital amount this would mean an upper withdrawal annual limit of R2m and a lower withdrawal limit of R50 000.

According to Treasury chief director of economic tax analysis Chris Axelson, these limitations will be changed temporarily until August 31.

The good news is that this will only be allowed until the end of August. The bad news is that people will not be encouraged to tighten their belts, but rather dig into their capital for temporary relief, with possible devastating outcomes in the longer term.