Living Annuities vs Guaranteed Annuities: Do you know the right horse for the course?

As a retirement fund member (i.e. you have money in a retirement annuity, pension or provident fund or pension or provident preservation fund) you're required to use at least two-thirds of your fund proceeds to purchase an annuity. This excludes your vested rights and any fund balance under R247,500. If you were over 55 and a provident fund member on March 1, 2016, contributions made after this date are also exempt.

An annuity provides a regular income for life, and you can choose between a guaranteed or a living annuity. If you’ve got more questions after reading this article, check out our blog Retiring with control and flexibility: Living annuities in a nutshell.

Guaranteed Annuity: A guaranteed annuity is purchased from a life assurance company, providing a fixed monthly pension for life. This ensures you against longevity and investment risks, but one of the major drawbacks is that the funds do not always transfer to your heirs upon death. However, you can opt for certain protections, like ensuring payments for a set period or providing for a spouse.

These additional protections typically reduce your monthly income. Annuity rates, which can vary by provider, depend on factors such as your age, gender, interest rates, and the type of annuity chosen. It's important to compare rates across different providers when considering a guaranteed annuity.

Living Annuity: A living annuity, on the other hand, is an investment product that shifts the responsibility of managing the risk of outliving your savings onto you. It offers greater flexibility in both investment choices and income withdrawal, and any remaining funds after your death can be passed on to your beneficiaries. However, you must manage the draw-down rate carefully, as withdrawing too much can deplete your savings prematurely.

Living annuities are offered by various financial institutions and can be managed through linked-investment service providers (LISPs). Some providers, like 10X Investments, offer these products directly to the public, potentially lowering costs.

Each year, you must withdraw between 2.5% and 17.5% of your living annuity’s value, with options to receive income at different intervals. You can switch providers if necessary and even convert a living annuity to a guaranteed annuity later, but not vice versa. After your death, your beneficiaries inherit any remaining funds, which can be taken as a lump sum, continued annuity, or accelerated payout. The residual capital is not subject to Estate Duty, but it is taxed based on how it is received.

Costs are an important consideration with any investment, and it’s the same for a living annuity. These products are potentially very expensive. Most living annuity charge initial fees, annual fees, transaction charges and investment management fees (on top of any advice and platform fees you may pay). In total, these charges can be as high as 2% pa of your capital. So do your homework at get a free cost comparison for your peace of mind!

Making a decision:

In choosing between the different types of annuities, you must consider a host of factors specific to you:

• your health, age and life expectancy
• how much you have saved
• your desired income (i.e. what kind of lifestyle you want to maintain)
• your need for investment and income flexibility
• the needs of a financially dependent spouse
• potential bequests
• relative investment costs
• and then, on a more dynamic level, prevailing interest rates (which drive annuity prices), the inflation outlook and – if you have strong views on this subject – the investment outlook.

For example, if you retire young, a low-cost living annuity may serve you better than a guaranteed annuity as the latter will factor in your increased life expectancy and pay out less. But in your seventies or eighties, the guaranteed annuity is likely to pay out more, as your life expectancy has fallen. And if you are in poor health or terminally ill, you will probably need your money sooner rather than later. In that case, a living annuity with a flexible draw-down rate may suit you more. This also ensures that your capital does not die with you.

Choosing the right annuity is a critical decision, and when comparing Living Annuity quotes it is important to use the same drawdown rate and frequency for each quote. This will ensure that a fair comparison is done and will also help with understanding the longevity of the investment. You can get a free, no obligation cost comparison at 10X to help you make your decision.

At 10X, our mission os to make sure you thoroughly understand the factors that should influence your decision at retirement. Even if you don’t end up becoming a 10X client, we feel we’ve done our job if you’re confident in your choices and have good reasons for going in the direction you’ve chosen. To get the best possible information, consider using one of the following:

• a living annuity calculator to do your planning efficiently
• an effective annual cost calculator
• get in touch with an experienced retirement investment consultant and soundboard your ideas