Lump Sum vs Living Annuity vs Life Annuity: Helping your parents choose

Your parents have worked for 40 years and now face their biggest financial decision. And the stats aren't great. The average retiree can only replace 31% of their pre-retirement income. With inflation a constant drain on buying power, and medical aid premiums increasing in leaps and bounds each year, it's no wonder that only 6% of us can maintain our standard of living in retirement.

Let's see what your folks need to consider to make the best of the retirement they deserve.

Three retirement income options, explained

If you're reading this, you're either watching your parents weigh up their options or you're thinking about retirement yourself. Either way, you need answers.

Luckily, retirement isn't actually very complicated. You've got three levers to pull, and once you understand what each one does, the decision becomes easier. Think of your retirement fund like the big screen TV you've always wanted. It's finally time to watch something, and you've got three buttons on your remote:

• The Netflix Button (Lump Sum): Take up to one-third cash now, pay tax, do what you want.
• The YouTube Button (Living Annuity): Control what you watch and when, but you might run out of data. At least you can switch providers anytime, thanks to Section 14 transfers.
• The SABC Button (Life Annuity): It's a bit boring, but it’s a reliable option that’s always there and never stops broadcasting. The insurance company pays you monthly till the day you die, and assuming it’s in the fine print, your spouse can get 50-100% after that.

Most South Africans push at least two of these buttons. The trick is knowing what combination suits your particular situation.

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The Cash Option and Its Tax Surprise

Let's talk about the lump sum. By law, you can take up to one-third of your retirement savings as a cash payment, and the first R550,000 is tax-free. The other two-thirds? That must go into an annuity, either living, life, or both.

You have full control over how you spend your lump sum, be it paying debts, buying that bakkie, or spoiling the grandkids. But be careful. The taxman has been waiting 40 years for this moment.

If you withdrew money from your retirement funds before, that counts against your tax-free R550,000. Got divorced? That settlement payment also ate into your tax-free portion. Here's how retirement lump sums are taxed in 2025:

If you choose a living annuity, money you don't take as a lump sum continues to grow tax-free inside your annuity. You only pay tax when you draw income, not on the investment growth itself. This tax-sheltered growth can compound significantly over your retirement years.

When a Lump Sum Makes Sense:

• High-interest debt: Consider paying off anything charging more than 10-12% interest
• No emergency fund: You should think about having 3-6 months of expenses saved
• Medical expenses not covered: Gap cover shortfalls, dental work, hearing aids, operations
• Home modifications: Age-proofing costs, perhaps R50,000-R150,000?
• Supporting adult children: 40% of retirees do it. Better to budget for it than pretend it won't happen.

When Not to Choose a Lump Sum:

• Your debt is at the prime rate: The math is borderline, so consider keeping the money in your annuity where it grows tax-free.
• You have no other retirement savings: If this is your only income source, you might want to think about preserving it for annuity income.
• You've struggled with money before: If you couldn't save while working, a lump sum at this point might go too quickly.
• For "Investment opportunities": Property schemes and business ventures often fail 
• You're healthy with longevity genes: If your family lives to 90+, you may need income for 30 years, which argue against taking cash today

You can take enough to kill expensive debt and cover real emergencies. But taking everything to buy that “guaranteed” rental property or invest in your brother-in-law's development scheme? That's how you end up being the cautionary tale at next year's family braai.

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A Living Annuity Means You're In Charge

Remember, you can only take up to one-third of your retirement fund as a lump sum. A living annuity is one place you can invest the money that you're not allowed to take as cash. You decide how much to withdraw each year, which can be anywhere from 2.5% to 17.5%. You pick the investments, you set the withdrawal rate, you're the boss (and you can leave the remaining capital to your beneficiaries, outside of your estate).

So your mom wants R35,000 a month. The advisor suggests R15,000. Who's right? The answer lies in understanding drawdown rates and how long money actually lasts.

Living Annuity Drawdown Maths

Your money survives retirement only if your withdrawal rate is less than your real returns (investment returns minus fees and inflation). With South African investments returning about 11.5% annually over the long term, minus 1.5% fees and 5% inflation, you potentially get 5% real returns (assuming your actually paying those low fees!). That's why experts suggest the "4% rule" to leave a buffer.

But if you're paying 3% in fees instead of 1.5%, your real return drops to just 3%. Now you can only safely withdraw 2-3% per year. On R3.2 million for example, that's the difference between R13,333 and R8,000 monthly. Let's have a look at some other scenarios with a R3.2 million living annuity.

So when mom wants R35,000 monthly (that's 13% annually) and the advisor suggests R15,000 (5.6%), the advisor isn't being stingy. He's trying to make sure you still have an income at 75.

When a Living Annuity Makes Sense:

• You have other income: Rental property, part-time work, or a spouse still working
• You want to give your capital a chance to grow: But bear in mind, markets move up and down
• You're can weather the storms: You can afford some market volatility, and are ok with seeing your investments go up and down
• You want to leave an inheritance: Whatever's left goes to your beneficiaries
• You're investment savvy: Comfortable choosing between equity funds, balanced funds, and offshore exposure (up to 45%)
• You value flexibility: Can adjust withdrawals annually, switch investment managers anytime

When Not to Choose a Living Annuity:

• You're starting with under R2 million and have no other reliable income: It’s a struggle to make the math work for 30 years.
• You panic when markets drop: Remember March 2020? If you sold everything then, watching your nest egg bob and weave with the markets might not be for you.
• You have no backup plan: No other savings, no family support, no Plan B.
• You're terrible with money: If you've never met a credit limit you didn't max, don't trust yourself with this.

A life annuity offers more stability than a living annuity. You hand your R3.2 million to an insurance company, and they guarantee you a monthly income until you die. No investment decisions, no withdrawal rates, no stress. You can choose level (same payment forever), escalating (increases annually), inflation-linked (keeps up with rising costs), with-profit (potential bonuses), or capital preservation (guarantees your money back). The insurance company is basically betting on when you'll die. Slightly morbid? Yes. Reliable? Absolutely.

Here's what a R3.2 million might buy (65-year-old male, 50% spouse benefit, actual rates might differ):

Key Features to Understand

• Guarantee Periods: 5, 10, or 15 years of payments continue even if you die early
• Spouse Benefits: 50%, 75%, or 100% of income continues to your spouse for life
• Capital Preservation: Guarantees your capital gets paid out, but with a much lower monthly income

Life annuities protect you from the risk of outliving your money. You can't panic-sell during market crashes, and you can't blow it on a bad business idea.

When a Life Annuity Makes Sense:

• You want guarantees: Payment arrives regardless of markets, politics, or load shedding
• Longevity in your genes: Granny lived to 95? You might too
• Poor financial discipline: Can't waste what you can't access
• Cover essentials: Lock in medical aid, rates, and groceries

When to Avoid:

• Want to leave wealth: Payments stop at death (except the spouse benefit)
• Need flexibility: Once in, you're locked. There’s no take-backs
• Have other guaranteed income: Rental property? You might consider skipping this

The Living Annuity and Life Annuity combo

Yip, you don't have to choose just one option. You can take some cash, buy some guarantees, and keep some control. One strategy that works for some is this: first, calculate your absolute essentials: medical aid, rates and utilities, groceries, insurance, and transport. Cover these with guaranteed income, then use the rest for growth and flexibility. Below are a couple of potential combinations (These numbers are meant to be indicative only. Real numbers may vary).

Conservative Blend: 40% life annuity, 60% living annuity at 3.5%

• 40% = R1.28 million to life annuity: Gets R7,040 monthly (inflation-linked)
• 60% = R1.92 million to living annuity: Gets R5,600 monthly

Balanced Blend: 25% life annuity, 75% living annuity at 4.5%

• 25% = R800,000 to life annuity: Gets R4,400 monthly (5% escalation)
• 75% = R2.4 million to living annuity: Gets R9,000 monthly

Ask yourself:

• Can you sleep if markets drop 30%? If no, you might lean toward life annuities
• Do you have other income (rental, part-time work)? Consider more in a living annuity
• Is leaving money to kids important? Definitely need a living annuity
• Are you terrible with money? Perhaps more life annuity

Considering using all three levers isn't indecisive; it's smart. Dad could get his bakkie, mom’s happy with her guarantees, and both get to sleep at night.

Do This Now (Before You Sign Anything)

Today: Email three providers for written quotes. Not WhatsApp or calls, email.

This Week: Download your bank statements and categorise every expense. You can't plan if you don't know what you spend. While you're at it, get your tax affairs straight on SARS eFiling. Then, understand how costs might increase over time, and what you must get our from your investments to cover those.

Before You Sign: Wait 48 hours. Sleep on it. Talk to someone who's not getting commission. 

Make sure to get these answers in writing: the total Effective Annual Cost (if they can't answer immediately, it’s often a red flag, fees in Rands and not just percentages (R66,000 is far more visceral than "2.2%"), and what happens to your money if you die at various points. Also, confirm whether you can transfer providers and at what cost, and whether there are penalties for changing strategies later. 

The Braai-Side Summary

Next time someone at a braai asks about retirement, you can try to explain it like this:

"You can take some cash upfront (but the taxman might take his cut). The rest you either control yourself with all the responsibility that brings, or give to an insurance company for guaranteed income forever. Some people mix both together. And watch those fees."

Your parents worked too hard for too long to mess this up now. Forward them this article, have the awkward conversation, and get those quotes in writing. Because the only thing worse than running out of money at 80 is knowing you could have prevented it.

Still confused? investment consultant. No jargon, no strings attached, just straight answers about your retirement options.