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Living annuity vs life annuity: Understanding your retirement income options

March 1, 2024
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Finsesh
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Finsesh

Living annuity vs life annuity: Understanding your retirement income options

Hey there, retiree. Congratulations on hitting the golden years of your life. You've saved up a bucket load, now let's discuss your income options. 

As complex as money jargon can be, it gets even worse at retirement. At retirement we can withdraw up to in cash from our pension funds and can either be invested in a life annuity or a living annuity. Both aim to provide an income for the investor at retirement, but they have some differences that will impact your planning. We will compare living annuity vs life annuity to understand the differences so you can make empowered decisions in your golden years.

 

What is a living annuity?

A living annuity is an investment and not an insurance policy. Living annuities can be invested in unit trusts, share portfolios, etc which can be chosen by the member, without regulation 28 constraints, meaning the investor carries all the investment risk and risk of capital depletion. The investor must withdraw an income from a living annuity between 2.5% and 17.5%. This withdrawal can be monthly, quarterly, or annually. Both the percentage income and when you want to receive your payment can be adjusted. 

If the investor passes away, the capital can be distributed to nominated beneficiaries. Your beneficiaries can elect to receive the residual value as a lump sum or as an annuity, or a combination of both.


 

What is a life annuity?

A life annuity pays a predetermined amount for life. There are various ways to structure your life annuity payment depending on the life company you invest with. Some options are linking the annual income increase with inflation, or having the income paid until the death of your spouse. Ensuring the correct income payment structure for your needs takes the investment risk away from the investor, as the life company has to fulfill payment according to the contract. One big benefit of life annuities is the potential to outlive your capital amount invested. 

The downside is that if you pass away you can't nominate a beneficiary to receive the remaining capital. If you choose to receive the payment until the death of your spouse, the annuity will continue until that date. 

 

Tax on my annuity?

For both annuities, you will pay income tax on the monthly payment you receive. In the pre-retirement stage, no tax was charged on any of your pension fund growth. Now SARS says it's time to pay your dues. 

 

What can I invest in?

Regulation 28, the law that protects investors at the pre-retirement stage does not apply to living annuities. This can be an advantage or a disadvantage depending on your investment skill level as no regulation will protect you from investment risk. It would be prudent to discuss your options with a financial advisor if you're uncomfortable making investment decisions. 

 

Can I withdraw my living annuity in full?

Once you invest you have to choose between 2.5% and 17.5%. You can withdraw the annuity unless its value is below R125 000. If it reaches this value you can withdraw your living annuity in full.

 

Living annuity vs life annuity differences:

CharacteristicLife AnnuityLiving annuity 
Investment riskNo riskInvestor carries risk
Capital at deathNo money passed to heirsCan nominate beneficiaries 
Income optionsPredetermined income for lifeFlexible between 2.5% - 17.5%
Tax on incomeIncome tax on monthly incomeIncome tax on monthly income

 

Living annuity calculator

To ensure you have enough capital to last your retirement years you must plan. Using this tool (living annuity calculator) will help you plan how long your investment amount will last given your withdrawal rate and investment returns. Use it to ensure the well-being of your golden years.

 

Hybrid options

It's not all doom and gloom if you think you only have one choice. There are smart ways to overcome this dilemma of choosing between a living vs life annuity. 

The first option is if you choose a life annuity you can take out a policy that pays out an amount to your beneficiaries on your death. This ensures your beneficiaries still receive an inheritance 

Certain providers such as Glacier provides a FlexiGuarantee (*Not sponsored by Glacier) product that blends the best of both these options into one. 

Summary: 

When comparing a living annuity vs a life annuity it's important to keep in mind the characteristics of each to ensure it suits your needs. Do all your research and consult with a financial advisor before making such an important decision, that will affect your golden years. 

 

If you want to find out more about becoming financially independent, please see our free course. If you want a blueprint toward financial independence, you can enrol in our Stages to financial independence course.

Onward to Financial Independence 

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