Taking the Next Step: Choosing Between a Living Annuity and a Life (Guaranteed) Annuity When You Retire

Those converting their retirement savings from a Regulation 28 fund upon retirement face the choice of investing in a living annuity or purchasing a life annuity (also called a guaranteed annuity). The key difference between the two is that a life (guaranteed) annuity is an insurance-type product, while a living annuity is more of an investment-style product. Both provide you with an income during retirement, but the flexibility, specific features, tax implications, and benefits associated with each differ.

The choice between a living annuity and a life (guaranteed) annuity can be a difficult one, as you will need to factor in your individual circumstances, time horizon, and the financial goals you have for your retirement savings; all of these are important considerations when choosing the avenue that best suits your needs. 

In this brief read, we’ll break down the differences between a living annuity and a life (guaranteed) annuity, their respective pros and cons, and take a look at the argument for considering a 10X Living Annuity and its underlying funds. 

Living Annuities

As mentioned, a living annuity is an investment-style product. Once you reach retirement, living annuities allow you to continue growing your retirement savings. You do this by investing your savings according to your investment goals and risk tolerance – and you would then draw down a retirement income set at a percentage of your choosing (between a minimum of 2.5% and a maximum of 17.5%). 

A key feature of living annuities is flexibility when it comes to how you manage your investment choices, as well as being able to control your drawdown rate and payment frequency according to your needs.

Benefits of Living Annuities

More and more money-savvy retirees are opting to finance their retirement with one or more living annuities, as the benefits of investing in a living annuity are considerable. In terms of flexibility and degree of control over retirement finances, a living annuity is a great option, as you can choose the underlying assets into which your funds are invested (within the parameters of the funds offered by the annuity provider) and if your investment grows, you are able to take more income if you choose. 

There are also notable inheritance benefits with living annuities. If there is capital remaining in your living annuity at the time of your passing, you are able to bequeath those funds to nominated beneficiaries. Spouses are also able to take out a new living annuity with the proceeds of their deceased partner’s annuity. 

The fact that you are able to adjust your income as you see fit – within the prescribed limits of 2.5% and 17.5% – allows you to strategize effectively and maintain a comfortable retirement while avoiding the depletion of your savings. When investment returns are particularly strong, you will see more income from your living annuity, and can revise your drawdown rate down to allow for greater growth of the underlying capital. 

Risks Associated with Living Annuities

The other side of the coin is the investment risk involved, which is borne by you, the annuitant. Your living annuity is subject to market volatility like any other investment. Although fund managers have a lot of experience and will typically be able to adjust your exposure as needed, ultimately you are responsible for reviewing the investment strategy applied to your capital. 

The ‘golden equation’ is a formula you can use to ensure you don’t deplete your savings and run out of money, and it should always be considered in the case of living annuities. The golden equation refers to the following: fees + inflation + drawdowns must be less than or equal to your return on investment. By implementing this formula, you can avoid depleting your capital. 

At 10X Investments, our underlying funds are designed to help you mitigate the risk of outliving your savings, with low and transparent fees, a diversified investment portfolio, and superior long-term returns. Coupled with this, our highly-experienced consultants are always a phone call or email away (there are no call centres at 10X). If you have any questions about your retirement savings, simply get in contact and chat to the professionals at 10X Investments. 

Tax Implications of a Living Annuity

The income you draw from your living annuity is taxed as regular PAYE income, but it is important to note that there is no capital gains tax on the investment growth within the living annuity. The ability to grow your savings through your investments, tax-free, is a major benefit that makes living annuities all the more powerful for strengthening your capital into retirement. There is also no estate duty levied on the proceeds of your living annuity upon your death, as the remaining capital does not form part of your estate. 

Suitability

Given the features that we’ve outlined so far, it’s clear that living annuities are a great option for individuals who want control over their investments and income throughout their retirement. However, one does need the willingness to weather market volatility. 

Life (Guaranteed) Annuities

A life annuity, also called a guaranteed annuity, is an insurance product that you typically purchase from a life assurance company. The insurer you purchase the annuity from is contracted to pay you an agreed monthly pension amount for the rest of your life. The insurer invests on your behalf, and you receive the same fixed income amount each month regardless of market performance. 

There are different types of life annuities, including single life annuities (which provide coverage for only one person and usually have a higher monthly payout), joint life annuities (which provide lifelong coverage to your spouse or other chosen beneficiary after you die), and escalating annuities (which increase your retirement income over time in line with an inflation index or another agreed fixed rate per year). 

Benefits of Life (Guaranteed) Annuities

The primary benefit of life annuities is the guarantee of income until the time of your passing – there is no longevity risk or investment risk to your retirement savings. Many retirees opt for life annuities in favour of a straightforward financial product with fixed, predictable payouts, which can be less stressful than monitoring the fluctuations of the market and the resultant impact on your living annuity. 

Risks Associated With Life (Guaranteed) Annuities

A potential drawback associated with life (guaranteed) annuities is the inability to adjust your income payments after the time of purchasing your annuity. While you may opt for a life annuity that increases at a set rate, for example, average inflation rates in the case of an escalating annuity, this amount cannot be altered again, leaving you with no flexibility in terms of your income.

There are also no inheritance benefits with life (guaranteed) annuities – at the end of your life, your guaranteed annuity capital goes to your insurer, not your beneficiaries. Finally, one of the biggest risks with life (guaranteed) annuities is the vulnerability of your income to inflation. Inflation could erode the purchasing power of your fixed annuity payments over time, meaning that while your income remains constant, or even increases over time according to your contract, if the costs of goods and services rise sharply, you might not be able to afford everything you’re used to. This scenario could significantly impact your standard of living during retirement, especially in your later years. 

Tax Implications of Life Annuities

Like a living annuity, your income with a life (guaranteed) annuity will be taxed according to SARS’ income tax rates. These rates can be found on the SARS website. As a result of your annuity capital being turned over to the insurer and your income ceasing upon your death, there would be no estate duty implications. There are also potential tax efficiencies offered by life annuities depending on personal circumstances, which are determined on a more individual basis – for example, some retirees with significant medical expenses can receive medical tax credits to reduce their taxable income.

Suitability

For individuals seeking the stability of a predictable income, life (guaranteed) annuities are a viable option. There is very little risk involved with purchasing a life annuity, aside from the risk of being overtaken by inflation and having one’s purchasing power be limited. Given that there is no continual management of income drawdown rate or investment strategy with life annuities, they are best suited to those who prefer a hands-off approach to their retirement finances 

Comparative Analysis Of Living And Life (Guaranteed) Annuities

Flexibility and Control

The most immediate comparisons to be made between living annuities and life (guaranteed) annuities are the differences in how you determine to receive your income, and how your retirement savings are treated with each.

With living annuities, you have flexibility with how you manage multiple aspects of your retirement income. Each year you are obligated to draw a pension from your living annuity investment, at a rate of minimum 2.5% and maximum 17.5% of the annual value of your residual capital at your policy anniversary date. You can change your draw-down rate from year to year, so long as you make your election change prior to your policy anniversary date. 

In addition to being able to change the percentage of the capital you drawdown as income, you are able to choose whether you receive your income monthly, quarterly, semi-annually, or annually. See here for our blog post covering how regularly reviewing your drawdown rate can help you maximise your retirement income. 

In contrast, with a life (guaranteed) annuity you are not able to adjust your income rate at all after making your initial policy selection. You are guaranteed to never run out of money, regardless of the length of your life or what happens in the investment market, but you will not be able to change your income rate outside of a pre-agreed percentage determined at the beginning of your policy (in the event that you purchase an escalating life annuity).

Navigating Market Volatility

With a living annuity, you choose how to put your retirement savings to work through your investment. You decide where to invest your savings within a basket of investment options (funds) offered by your provider. If you opt for a living annuity, you are choosing to deal with the associated market volatility. 

One investment approach that retirees are increasingly employing in order to mitigate market risk is to invest more offshore. Diversifying your portfolio with international investments can help to protect your capital from country-specific risks. Click here for our blog post detailing how you can benefit from investing offshore (you can invest up to 100% offshore with a 10X Living Annuity).

Risk and Security

When deciding between a living annuity and a life (guaranteed) annuity, you should consider whether you are prepared to take on investment risk and develop strategies for managing your portfolio towards growth, or whether you prioritise income security over the potential to grow your savings through investment. 

Should you opt for a living annuity with intent to grow your savings, 10X Investments is here to help you out. We offer a range of funds with various risk profiles so you can build a portfolio that aligns with your risk tolerance and financial goals. These profiles describe the nature of investments rather than the investors themselves, determining the appropriate asset allocation to balance risk and reward. 

For example, an aggressive fund is likely to have a higher allocation to equities, while a conservative fund will typically include a higher allocation to lower-risk assets like bonds and less volatile equity sectors. Investing inherently carries risk, so it’s essential to be comfortable with the level of risk your portfolio carries. 

• Conservative Risk Profile: Funds with a conservative risk profile are characterised by a focus on preserving the value of the investment portfolio rather than maximising returns. These funds involve low-risk investments, even if it means lower potential returns.
• Moderate Risk Profile: Funds with a moderate risk profile balance risk and return by incorporating a mix of capital preservation and growth-oriented investments. These funds favour a medium level of risk to achieve higher potential returns compared to conservative funds.
• Aggressive Risk Profile: Funds with an aggressive risk profile involve higher risk to maximise returns, including the potential for significant fluctuations and losses. These funds often invest in more volatile sectors to achieve higher growth.

10X Investments provides a range of funds designed to cater to different investment objectives. These funds are managed with a focus on asset allocation, diversification, and low fees to deliver consistent long-term growth. Here’s a summary of some of our funds and the type of investor best suited to each:

10X International High Equity Fund

The 10X International High Equity Fund is designed for investors with a high risk tolerance and those seeking maximum growth. This fund primarily invests in equities, including more volatile sectors, with a focus on international investment opportunities offering the potential for higher returns.

This is a high risk profile fund with an ideal time horizon of five years or longer, suitable for aggressive investors who are wanting to explore offshore investments and who are comfortable with market volatility.

10X International Medium Equity Fund

The 10X International Medium Equity Fund balances risk and return by investing in a diversified combination of local and offshore asset classes. This fund aims to provide long-term capital and income growth while maintaining a balanced approach to offshore investing.

This high risk profile fund has a time horizon of five years or longer, and is suitable for investors seeking a cost-effective way to access international markets while maintaining exposure to the South African economy.

10X Defensive Fund

The 10X Defensive Fund focuses on preserving capital and generating stable income. It invests primarily in defensive assets with a smaller allocation in growth assets, aiming to provide consistent returns with minimal volatility.

This fund has a low risk profile and a time horizon of between one and three years. It is most suitable for conservative investors seeking a steady level of income together with capital growth at low volatility, prioritising capital preservation over high returns.

10X Income Fund

The 10X Income Fund is a multi-asset fund tailored for investors seeking a high level of income and long-term capital stability, through investment into a diverse range of local and international interest-bearing assets.

The 10X Income Fund is a high risk profile fund, suitable for income-focused investors with an ideal time horizon of three years or longer.

10X Your Future Fund

Our flagship fund, the 10X Your Future Fund, is designed to provide long-term capital growth through investment into a diversified mix of local and international asset classes. This fund aims to balance growth and risk, making it suitable for investors looking to secure their financial future with a higher potential for returns. As a product of our keen focus on maximising net returns at 10X, the Your Future Fund consistently outperforms industry benchmarks with annualised returns of 12.1%.

This fund stands as a comprehensive solution for investors looking to build their wealth and reach their long-term financial goals. It has a high risk profile, ideal for a wide range of investors who are looking for a balance between growth and risk. This fund is ideal for those who have a longer investment horizon and are seeking cost-effective, diversified exposure across multiple asset classes and geographies.

Inheritance and Estate Planning

Living and life annuities both come with specific inheritance benefits and estate duty implications that should also be considered when deciding on an annuity that best suits you.

In the case of living annuities, you would nominate beneficiaries who will receive any residual capital remaining upon your death. Because the capital is paid directly to your beneficiaries, the funds bypass the deceased estate and any subsequent estate taxes. In this way, living annuities can be used as an estate planning tool to reduce the overall tax liability in your estate, while also making financial provisions for your loved ones. Your beneficiaries will be able to choose whether they receive the full amount of your annuity in cash (which would be subject to SARS special tax rates found here) or to keep the funds as a living annuity from which a regular income must then be drawn.

Life (guaranteed) annuities differ because they are effectively a form of long-term insurance policy. Generally, though, the life annuity ceases upon your death and there is no fund benefit available to pass to beneficiaries. You are able to structure a joint-life annuity which ensures the annuity income is paid out until the death of a second spouse, but there is no lump sum benefit as exists with living annuities. 

Income Stability and Inflation Protection

Weighing up the tough choice between the stable income provided by life (guaranteed) annuities versus the potential for growth in living annuities can be a hurdle for those deciding how to use their retirement savings. Add the question of inflation to the mix and it can become an even tougher choice. Let’s dig into how living annuities and life annuities mitigate the risk of inflation impacting your retirement income.

As mentioned, life (guaranteed) annuities pose the risk of purchasing power being eroded. If you opt for an inflation-linked life annuity, your income will increase by the same percentage as the rise in the CPI (Consumer Price Index). While you are protected against inflation at a baseline, some things like medical costs often increase year-on-year at a greater rate than annual inflation. With living annuities, if your returns are not balanced against costs, drawdowns and inflation, you risk outliving your savings – a risk that can be accelerated by increasing inflation. 

To counter this, annuitants are encouraged to understand how their fees impact their investments over time, and consider changing providers if it will make a positive difference. Also, regularly reviewing and adjusting their income drawdown rate can help with managing a constantly-moving inflation rate. Ideally, as mentioned, your income drawdown + the inflation rate + fees must be equal to or  less than your investment returns in order to avoid depleting your savings. Click here for a more detailed breakdown of how to avoid depleting your living annuity funds during retirement. 

Fees

While inflation is out of your control, the fees you pay to your annuity provider are not. The compounding effect of high fees is one of the biggest factors limiting the growth of your retirement savings, which is why you’ll want to seek out a provider with fair, transparent, low fees.

High fees reduce your money by eating into your investment returns, compounding the effect over time. Even a seemingly small difference in fees, such as 1% versus 3%, can significantly impact your savings due to the power of compounding. Low fees, on the other hand,  help you build your capital more efficiently as more of your returns are reinvested, allowing your savings to grow faster. 

Lower fees means more capital that you are able to put to work, which directly results in increased growth of your money. For example, here at 10X we remain committed to low fees that don’t eat away at your investment. Your first R5 million brings fees of just 0.86%, and this number progressively gets lower the more you invest – your next R5 million will see 0.57% in fees, and your next R10 million will see 0.40% in fees. 

Take a look at our Effective Annual Cost (EAC) calculator and our free cost comparison tool to assess and compare the impact of fees on your savings. 

Tax Considerations

The lump sum transfer you make to your living annuity is tax-free, and you are also not taxed on the investment return – this is a particularly attractive feature of living annuities for many potential investors, as it means your investment growth is able to compound much more effectively. As mentioned, both living annuities and life (guaranteed) annuities require that you pay regular PAYE tax on the income you draw.

More Insights and Alternative Options

While many retirees opt for either a living annuity or a life (guaranteed) annuity, it is possible (and can be beneficial) to have multiple living annuities or to have a combination of both kinds of annuity. It is also possible for living annuity investors to reinvest any excess living annuity income into a retirement annuity, which can then be 'retired' back into the living annuity at a later date. This approach to investing your retirement savings was discussed in our recent webinar, but let’s explore a bit more of why investors consider these options.

Multiple Living Annuities

Investing in multiple living annuities can be a strategic way to effectively manage your retirement income. This approach allows you to further diversify your investments and enhance flexibility by having differing drawdown rates and asset allocation. By spreading your investments across different living annuities, you are able to tailor multiple portfolios to meet your specific investment needs and preferences. For some retirees, this strategy provides greater financial security and flexibility, as it allows them to make adjustments based on the performance of each annuity.

Combining Living Annuities and Life (Guaranteed) Annuities

A mix of living annuities and life annuities can create a balanced retirement strategy, as you are afforded the flexibility and control over your investments and withdrawals from a living annuity, as well as a steady, reliable income stream from a life (guaranteed) annuity. For some retirees, combining the two types of annuities can optimise income stability as well as growth potential, as living annuities cater to changing financial needs while life (guaranteed) annuities ensure a reliable base income to safeguard against longevity risk.

Reinvesting Excess Living Annuity Income into a Retirement Annuity

Diverting surplus living annuity income into a retirement annuity can be an effective tax-saving strategy, as investors can benefit from tax deferrals which reduce their immediate taxable income. When the retirement annuity is eventually ‘retired’ back into a living annuity, it can provide additional tax-efficient retirement income. This cyclical reinvestment can help maximise retirement savings and provide a more sustainable and tax-optimised income stream for retirement. 

Long-Term Performance of Living Annuities

Fundamentally, at 10X Investments our aim is to give investors more money for their retirement. Our  long-term strategic asset allocation, diverse investment options, and uniquely low fees all speak to this goal. 

With returns that consistently outperform multi-asset market benchmarks, opting to invest with 10X offers you the peace of mind that your money is working for you. The 10X Your Future Fund has consistently outperformed the average returns of its peers since the fund’s inception in January 2008. Beyond returns, our well-diversified portfolios are designed to mitigate the impact of market risk and to deliver strong long-term returns. 

If you’re unsure about your current investments at 10X we offer a free, personalised comparison report. Should you have any questions about living annuities and whether they would be the right fit for your retirement, just get in touch with one of our expert consultants and we’ll be happy to chat through your options. Ready to apply for a living annuity? Visit our product page to get started.