Living annuity vs life annuity: choosing the right one for your retirement

One of your most important financial decisions is how you’ll turn your savings into an income to sustain you in retirement.

And a sustainable income that suits your needs means making the right annuity choice - choosing between a life annuity and a living annuity – different retirement vehicles that fulfil very different needs.

What will be right for you depends on your life expectancy, how much risk you’re willing to take, whether leaving money to your family matters to you, and whether you want a stable, guaranteed monthly income or the flexibility to amend your income on an annual basis if required. Take a look at how both options could benefit you and best serve your post-retirement needs.

What is a life annuity?

A life annuity (or guaranteed life annuity) is an insurance product that pays you a fixed monthly pension for life.

How it works

• You pay a lump sum to an insurance company, and they work out your monthly payment based on your age, gender and current interest rates.
• The insurer then pays you every month for life.
• When you die, the payments stop, and your capital does not pass to your heirs (unless you’ve opted into specific features for that purpose).

Important note: after buying a guaranteed annuity you can’t change your mind, switch providers or surrender the annuity. So be sure before you decide.

Here’s an example of someone for whom the life annuity works for their needs:

Meet Ahmed, aged 65

Ahmed will retire soon with R5 million saved. His monthly expenses – housing, medical aid, groceries – amount to R30,000. Ahmed is worried about:

• Outliving his savings
• The value of his investments rising and falling over time
• Managing those investments himself

His financial adviser told him:

• When he dies, his income will stop unless he makes extra provision for his family.
• He will receive an income no matter how long he lives.
• If he passes away early, the capital does not pass to his heirs.

With this advice, Ahmed decides on a guaranteed life annuity that pays him R32,000 per month (which will grow by 5% a year to keep pace with inflation).

Why is this option might suit Ahmed’s needs?

• His essential expenses are covered for life, however long he lives.
• He does not need to track how the markets perform.

For Ahmed, certainty outweighs flexibility, so this is a win for him. But what about the alternative?

What is a living annuity?

With a living annuity, your money stays invested. Each year, you choose how much income to withdraw (“drawdown”) – between 2.5% and 17.5% of your fund’s value. This lets your investments keep growing to replace what you drawdown and keep up with inflation.

Unlike a guaranteed annuity, which provides a fixed income for life (however well or poorly markets perform), you have more control. But that also comes with a responsibility: you must decide both how to invest your capital and how much income to drawdown.

How it works

• You invest your retirement savings in a portfolio of funds and then choose how much income (within the legal limits) to withdraw each year.
• You can pass on any leftover capital value to your beneficiaries when you die.
• All your investment growth is tax-free. However, income withdrawals are taxed as income.

So, what kind of financial goals does a living annuity suit?

Meet Maria, aged 62

Maria retires with R6 million in the bank and essential expenses of R20,000 per month.

Maria also wants:

• The flexibility to travel in her retirement.
• To leave a legacy for her children.
• To invest for growth to help her income keep up with rising costs.

What her financial adviser told her:

• She will have investment control.
• She can decide how much income to drawdown each year (many people start at around 4% of their savings).
• It may make it easier for her to pass on what’s left of her savings to her children.

With this advice, she invests in a diversified living annuity portfolio.

Outcome:

• Her capital keeps growing, depending on market performance.
• She can reduce income later if markets underperform.
• If she passes away, the remaining capital transfers to her beneficiaries.

Maria also realises that this option comes with associated risks such as running out of money if she withdraws too much or if her returns do not keep up with inflation. She could also possibly outlive her savings. Maria accepts this investment uncertainty in exchange for flexibility and the freedom to leave something to her children.

Now how do you choose which one is best?

We can never tell you which one to choose, but your financial adviser can help you decide on one best fitted to your retirement plans.

A life annuity may suit you if:

• You want absolute income certainty.
• You rely heavily on your retirement savings to fund basic living costs.
• You don’t want to take on the risk and responsibility of managing the portfolio yourself.

A living annuity may suit you if:

• You have more than enough money to cover your needs.
• You want to give it a chance to grow.
• You want to leave some to your descendants.
• You will be disciplined about not withdrawing more than you can afford.

Can I combine both annuities?

Some retirees do choose this path, combining a life annuity to cover essential expenses with a living annuity for big purchases (like travel) and legacy planning. By separating “survival income” from “lifestyle income,” this option can give you peace of mind as well as some flexibility.

Something to consider

Deciding between a life annuity and a living annuity isn’t just a choice between two products. Rather, it’s about how much uncertainty you’re comfortable accepting.

At 10X Investments, we keep our fees clear and straightforward. We focus on long-term investing to help your money last. Your retirement savings represent years of hard work, so your income plan should protect that and support the life you want to live.

If you’re unsure which option is right for you, speak to your financial adviser or a 10X Retirement Benefit Counsellor.

The content herein is provided as general information and does not constitute financial advice. 10X Investments is an authorised FSP (number 28250). The 10X Living Annuity is underwritten by Guardrisk Life Limited.