Choose wisely and set yourself up for the future

3 Apr 2025

If you opt to take an inheritance as a living annuity, the tax savings could be huge, as opposed to paying 36% tax on a lump sum. A blend of both might be another option.

Question: My mother recently passed away and I will be inheriting a living annuity that paid her an income of R20,000 a month and is worth R5-million.

I have been given the option of taking the R5-million as a lump sum or receiving a monthly income. I understand there are tax implications and need some guidance as to which is the better option.

Answer: I can’t give you an authoritative answer without understanding your personal circumstances better. For example, I need to know what income you are receiving, your marginal tax rate, your retirement savings as well as any short-term capital needs.

I will, however, go through the pros and cons of each option, which should help to make a more informed decision.

Take the inheritance as a lump sum

If you take the capital value as a lump sum, it will trigger retirement lump sum tax. The amount of tax that you pay will depend on whether your mother had taken a lump sum when she took out the living annuity.

If your mother had not taken a retirement lump sum, then the tax that you would pay on the R5-million would be about R1.5-million. The calculation is shown below.

If your mother had previously taken a large lump sum, then the R5-million would be taxed at a rate of 36%, so the tax payable would be R1.8-million. You would therefore get out an after-tax amount of R3.2-million, which you could use as you wish.

As this is after-tax money, any investment that you make with these proceeds will only trigger capital gains tax. This can provide you with a tax-efficient income in the future.

Take the inheritance as an income

If you take the inheritance as a living annuity and receive it as income, you will not pay any tax on the capital amount. The full R5-million will be transferred to a living annuity in your name. In addition, it will continue to grow in a tax-free environment.

This is a fantastic benefit and a great way to build your family’s long-term wealth.

You are obliged to take a minimum income of 2.5% a year from this living annuity. This will be taxable at your marginal rate. If you do not need the additional income, then I would recommend that you reinvest this additional money into a retirement annuity in order to remain in a tax-neutral situation.

The big advantage of going this route is that it will make a massive difference to your retirement income when you stop working.

I do a lot of retirement counselling and regularly come across situations where the retirement savings are not enough to provide the kind of income the retired person would like to have. By boosting your retirement savings by R5-million and having this grow until you retire, you will be setting up yourself and your family for a high level of financial security in the future.

The answer will probably lie in taking some of the money as a lump sum and the balance as an annuity. Do speak to a financial adviser about the correct structure. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to [email protected]

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.

Categories:

Tags:

DM is much better if you are signed in...

Business Maverick

Take the inheritance as a lump sum

Take the inheritance as an income