Up until a few years ago, South Africans overwhelmingly chose living annuities over life annuities when converting their retirement savings into a pension. This ratio has changed from about 90%-10% in favour of living annuities to closer to 60%-40%, according to research in 2024 by Coronation Fund Managers and confirmed by Momentum. One reason for the shift, according to Momentum, was regulatory changes that compelled retirement funds to offer members in-house pension options.
The products differ as follows:
• Living annuity: You transfer your savings to an investment platform with a choice of underlying funds. You must draw between 2.5% and 17.5% of your capital per year. If you don’t manage your investment carefully, your capital may not last as long as you do.
• Life (or guaranteed) annuity: Your retirement lump sum buys a pension for life from a life insurance company. You may choose to receive a level pension for life, increase it by a fixed percentage (say 5%) per year or have an inflation-linked pension. For the escalating and inflation-linked options, the initial rate will be lower. You can also choose a joint life and survivorship option whereby a surviving spouse carries on receiving the pension after the death of his/her partner. These products may also come with a 10-year guarantee – if you die within 10 years the pension goes to a designated beneficiary for the remaining period.
Pros and cons
One of the main reasons South Africans prefer living annuities is that any left-over capital will go to their heirs. There is also the possibility of higher returns from higher-risk equity investments.
However, volatility in the equity markets makes the idea of having a steady income for life increasingly attractive. It also tends to push up life annuity rates, as life insurers invest primarily in bonds.
Life annuity rates are fixed (apart from any specified escalation) at the date of inception, so it is advantageous to buy when the rates are high.
In a recent article directed at financial advisers, Deane Moore, CEO of life annuity provider Just SA, notes that life annuity rates have risen 11% this year amidst the market volatility precipitated by the Trump administration’s disruption of the global economy and, here in South Africa, uncertainty about the future of the Government of National Unity. Moore says pensioners can “lock in the peace of mind of a guaranteed income for life rather than riding the emotional and financial roller-coaster of some of the most volatile investment conditions seen this millennium”.
Comparing drawdown rates
Financial experts say that, ideally, in order to preserve capital through market cycles, living annuitants should not draw much more than 4% of their capital per year. Few retirees can manage to live off such a low rate – according to the Association for Savings and Investment South Africa, the average drawdown rate is between 6% and 7%.
On a R1 million investment, a drawdown of 4% would give you a monthly income of R3 333. A 6% drawdown would give you R5 000 a month.
By comparison, the current life annuity rate for a 60-year-old man, with a built-in 10-year guarantee and 5% annual escalation, averages about R6 800 across providers, according to figures published on the Masthead website. A joint life and survivorship annuity, covering both spouses of similar age, would typically be about 17% less than that, or about R5 640. This is substantially higher than a risky 6% drawdown on a R1 million living annuity.
It’s important to remember that, while you can switch from a living annuity to a life annuity, you cannot do the opposite. You are in a life annuity for life.
