Lize de la Harpe, Senior Legal Advisor at Sanlam
At retirement a member of a retirement fund (excluding certain provident fund members) is entitled to withdraw up to the maximum of one-third of the underlying fund value as a lump sum. A minimum of two–thirds of this value must be used to buy a compulsory annuity.
This compulsory annuity can be provided by the retirement fund or, alternatively, the retirement fund can transfer the obligation to provide an annuity to a registered insurer. In terms of the arrangement with the insurer, the insurer then undertakes to provide an annuity income to the former member.
The annuity to be provided may, depending on the former member’s election, either be a conventional annuity or a living annuity as defined in the Income tax Act 58 of 1962. Importantly, the annuity must be compulsory and non-commutable.
Before going any further, we first need to recap on the definition of a living annuity.
“Living annuity ”is defined in section 1 of the Income Tax Act, 1962 and reads as follows :
“living annuity ” means a right of a member or former member of a pension fund , pension preservation fund, provident fund, provident preservation fund or retirement annuity fund, or his or her dependant or nominee, or any subsequent nominee , to an annuity purchased from a person or provided by that fund on or after the retirement date of that member or former member in respect of which —
(a) …
(c) the full remaining value of the assets contemplated in paragraph (a) may be paid as a lump sum when the value of those assets become at any time less than an amount prescribed by the Minister by notice in the Gazette ;
…
(eA) in anticipation of the termination of a trust , the value of the assets referred to in paragraph (a) must be paid to the trust as a lump sum pursuant to that termination; and
…;
As mentioned above, the annuity purchased at retirement must be non-commutable. As you can see from the wording of the definition of a “living annuity” as quoted above, there are only two instances in which you can commute (cash out) a living annuity, being (1) when the commutation (de minimis) threshold is met; and (b) upon the termination of a trust as nominee.
- Commutation (de minimis) threshold – sub-paragraph (c)
Sub- par (c) of the definition of living annuity (quoted above) makes provision for the commutation of an annuity where the value of the annuity becomes less than an amount determined by the Minister.
As of 1 March 2026, the commutation threshold is R150 000.
- Termination of a trust as nominee – sub-paragraph (eA)
As of 1 March 2021, living annuities may be commuted where the trust, that was initially nominated as the owner of a living annuity upon the death of the original annuitant, is in the process of being terminated.
The commutation rules which apply to the original annuitant also apply to the annuity payable to a subsequent nominee appointed by the original annuitant.
How do you calculate the commutation (de minimis) threshold?
It is possible for annuitants to have multiple living annuities, for example:
1. Where you are a member of multiple retirement funds (for example, your employer pension fund as well as a retirement annuity fund). Retiring from each fund is a separate event, giving you the opportunity to buy an annuity policy with the retirement benefit payable from each fund.
2. SARS Binding General Ruling 58 confirmed that the rules of retirement funds may provide for members to elect to receive their retirement benefits from multiple annuities of each type, thereby allowing a member to “split” their retirement benefit between multiple living annuity policies.
Different interpretations have arisen regarding whether the commutation threshold mentioned above applies on a per-policy basis or cumulatively per insurer or fund (with SARS maintaining and applying the latter interpretation).
ASISA previously raised the matter with Treasury, which in turn undertook to engage with SARS on the matter. SARS has continued to apply the commutation threshold on an insurer level, and not on a policy level.
Earlier this year, as part of the 2026 Budget announcement, Treasury announced that the definition of “living annuity” in section 1 of the Income Tax Act will be amended to explicitly provide that the prescribed commutation limit must be determined cumulatively where an annuitant holds multiple living annuities with the same insurer or fund.
Draft 2026 TLAB and TALAB
The 2026 draft Taxation Laws Amendment Bill (TLAB) and draft Taxation Administration Laws Amendment Bill (TALAB) have now been published for comment by 12 September 2026.
The 2026 draft TLAB provides the necessary legislative amendments required to implement the tax announcements made in Chapter 4 and Annexure C of the 2026 Budget Review, as well as technical corrections. Included in the proposal is that the definition of “living annuity” in the Income Tax Act be amended to expressly provide that the prescribed de minimis limit must be determined on a cumulative basis where an annuitant holds multiple living annuities with the same insurer or fund.
Conclusion
This is a welcome proposal as it will (once final) ensure a consistent application of the law and support the policy objective of preserving retirement savings to provide sustainable income in retirement.
ENDS
