Choosing Between Living and Life Annuities: What Every South African Retiree Should Know

Retirement is a time to enjoy the fruits of your labour, but ensuring those fruits last a lifetime requires critical financial decisions. One of the most important choices retirees face in South Africa is between a living annuity and a life (or guaranteed) annuity. Understanding their differences, pros, and cons—and how they’ve evolved over time—can help you make the best choice for your future.

Living Annuity: Flexibility with Responsibility

A living annuity allows you to draw an income from your retirement savings while maintaining control over how the remaining funds are invested.

Pros

• Flexibility in Income: You can adjust your annual income within the legal limits (2.5% to 17.5% of your capital).

• Investment Control: Choose your investment strategy, from conservative options to higher-growth portfolios.

• Inheritance: Any remaining funds can be left to your beneficiaries.

Cons

• Longevity Risk: If you outlive your savings, your income will stop.

• Market Risk: Your income depends on investment performance, which can be volatile.

• Complexity: Requires ongoing financial management and regular reviews.

Living annuities suit retirees who want flexibility and have a good grasp of investment principles or a trusted financial planner to guide them.

Life Annuity: Security and Peace of Mind

A life annuity, on the other hand, provides a guaranteed income for life, purchased from an insurer. Once you buy a life annuity, you cannot change its terms.

Types of Life Annuities in South Africa

1. Level Annuity: Provides a fixed income, which may lose purchasing power over time due to inflation.

2. Inflation-Linked Annuity: Income increases with inflation but starts lower than a level annuity.

3. With-Profit Annuity: Annual increases depend on the insurer's investment performance.

4. Joint Life Annuity: Provides income until both you and your spouse pass away.

5. Guaranteed Term Annuity: Guarantees income for a set number of years, even if you pass away during the term.

Pros

• Guaranteed Income for Life: You cannot outlive your income.

• No Market Risk: Income isn’t affected by market fluctuations.

• Simplicity: Once purchased, requires no further management.

Cons

• No Flexibility: Income is fixed, and you cannot adjust it.

• No Inheritance: Once you and your spouse pass away, the insurer retains the remaining funds (except for guaranteed term options).

• Inflation Risk: Without an inflation-linked annuity, your purchasing power can decline.

Life annuities are ideal for retirees prioritizing certainty and simplicity over flexibility.

How LISP Platforms Have Evolved

Linked Investment Service Providers (LISP) platforms have revolutionized how retirees access annuity products in South Africa. Initially, they offered limited investment options, often linked to a single provider. Over the years, LISPs have transformed into comprehensive platforms offering:

• Broad Investment Choices: From traditional unit trusts to ETFs and bespoke portfolios.

• Multi-Manager Portfolios: Access to professional fund managers who balance risk and return.

• Transparency: Improved cost structures and clear reporting on fees and performance.

• Technology-Driven Tools: Interactive dashboards and calculators for tracking investments.

Today, LISPs allow retirees to blend their annuity choices, investing in living annuities while securing a portion in guaranteed life annuities, creating a balanced approach.

Key Considerations When Choosing

• Risk Tolerance: If you’re comfortable with investment risk and seek flexibility, a living annuity might suit you. For guaranteed peace of mind, consider a life annuity.

• Life Expectancy: A life annuity protects against outliving your funds, which is especially important for those with a family history of longevity.

• Inflation Protection: Inflation-linked or with-profit annuities safeguard against eroding purchasing power.

• Legacy Goals: If leaving an inheritance is a priority, a living annuity provides that opportunity.

Hybrid Solutions: The Best of Both Worlds

For many retirees, the choice doesn’t have to be binary. Modern LISP platforms allow you to combine living and life annuities, ensuring:

• A guaranteed income to cover essential expenses.

• Flexibility for discretionary spending and legacy goals.

The Evolution of Annuity Products in South Africa

In the past, annuity options were limited, with rigid structures that often-favoured providers over retirees. Today, annuities have evolved significantly:

• Customizable Features: Add inflation protection, guaranteed periods, or spouse benefits to suit individual needs.

• Lower Costs: Competition among providers has reduced fees.

• Increased Transparency: Clear terms and conditions help retirees make informed decisions.

These advancements have made annuities more adaptable to the diverse needs of South African retirees.

Final Thoughts

Choosing between a living or life annuity—or a combination of both—is one of the most important financial decisions you’ll make in retirement. By understanding their features, weighing the pros and cons, and leveraging modern LISP platforms, you can create a retirement income plan that aligns with your lifestyle and goals.

If you’re unsure which option is best for you, consult a fee-for-service financial planner. With unbiased advice, you can navigate this decision with confidence and ensure a secure, fulfilling retirement.