AS Brokers insight · Retirement income

Living Annuity vs Life Annuity: How South African Retirees Should Actually Choose

Choosing how to draw a retirement income is one of the most important — and most misunderstood — decisions you will ever make. One option offers flexibility and a possible legacy. The other offers an income you cannot outlive. For most retirees, the wisest answer is not actually one or the other.

When you retire in South Africa, your accumulated savings stop being a number on a statement and start having a job: paying you for the rest of your life. The vehicle you choose to do that job — a living annuity, a life annuity (often called a guaranteed annuity), or a combination of the two — will shape your income, your peace of mind and what you leave behind for the next two or three decades. Get it right and the decision quietly supports you for the rest of your life. Get it wrong and it is, in one direction, almost impossible to undo.

This guide explains how each product works in plain language, how they are taxed, what happens to your capital when you die, and how an experienced adviser actually reasons through the choice. The goal is not to sell you a product. It is to help you understand the trade-off well enough to choose with confidence.

First, the decision you’re really making

Before comparing products, it helps to understand why the choice is forced on you at all, and why it matters so much.

The two-thirds annuitisation rule

When you retire from a pension fund, retirement annuity or preservation fund, South African law generally allows you to take up to one-third of the value as a cash lump sum. The remaining two-thirds must be used to buy an annuity — a product that pays you a regular income. That is the legal starting point of this entire decision. (Below a small statutory threshold, the full amount may be taken in cash, and provident-fund balances accumulated before March 2021 have their own treatment. These details are worth confirming for your specific situation.)

How the two-pot system feeds this decision

Under the two-pot retirement system, contributions made from September 2024 are split into a savings component and a retirement component. The retirement component cannot be taken in cash — it must be used to provide an income at retirement. In practice this means a growing share of your savings is legally channelled towards exactly the choice this article is about. The annuity decision is becoming more central, not less.

Why this choice matters more than almost any other

Most financial decisions can be revisited. This one largely cannot. You can move from a living annuity to a life annuity later, but you can never move from a life annuity back to a living annuity. That asymmetry alone means the decision deserves more thought than the average retiree gives it — and far more than the average product brochure encourages.

How the drawdown works

South African regulation requires that you draw between 2.5% and 17.5% of the value of the investment each year. You set that percentage once a year on the policy anniversary. Draw too little and you may underspend a comfortable retirement; draw too much and you risk eroding the capital that has to last for decades.

You keep control of the investments

The capital remains yours and stays invested in the market. You can adjust the underlying funds, hold meaningful offshore exposure, and change your income level annually as your needs change. For many retirees this flexibility is the single most attractive feature — and it is genuine.

What happens to the capital when you die

Whatever is left in the living annuity passes to your nominated beneficiaries. They can usually take it as a lump sum, continue it as an annuity, or combine the two. Importantly, this capital generally falls outside your estate for estate duty purposes — a meaningful advantage that is often overlooked. The catch is simple but vital: there is only something to leave if there is something left.

What a life annuity is — in plain language

A life annuity (the product many people call a guaranteed annuity) works differently. You hand a capital sum to an insurer, and in return the insurer pays you a guaranteed income for the rest of your life — no matter how long you live and no matter what markets do. The income simply continues.

How “income for life” actually works

The mechanism that makes a lifelong income possible is called pooling, or mortality credits. The insurer combines the capital of many retirees. Those who die earlier than expected effectively subsidise those who live longer. This is not the insurer “keeping your money” in any sinister sense — it is the structure that allows the pool to pay an income no individual investor could safely guarantee on their own. It is the same principle that lets insurance work at all.

The main types you can choose

• ▸Level annuity: a fixed income that never changes. It starts high but loses purchasing power to inflation over time.
• ▸Escalating annuity: the income rises by a fixed percentage each year, helping it keep pace with rising costs.
• ▸Inflation-linked annuity: increases are tied to inflation, protecting real spending power.
• ▸With-profit annuity: increases depend on the insurer’s investment performance, smoothed over time.
• ▸Joint-life annuity: continues to pay your spouse after your death, protecting the survivor.
• ▸Guaranteed term: pays for a minimum number of years even if you die early, so a portion is not “lost” on an early death.

What happens to the capital when you die

In the simplest single-life annuity, the income stops when you die and there is no residual capital to leave. This is the feature retirees fear most. But it can be softened: a guaranteed term ensures payments continue for a set period, and a joint-life option keeps the income flowing to your spouse. These features reduce the income you receive, but they directly address the legacy concern. It is not as all-or-nothing as it first appears.

The risks the insurer takes off your hands

In exchange for your capital, the insurer absorbs the three risks a living annuity leaves with you: investment risk, sequence risk and longevity risk. You can live to 105 and the income still arrives. That certainty is the entire point of a life annuity — and for the right person, it is worth a great deal.

The honest side-by-side comparison

Flexibility vs certainty

A living annuity gives you control and the freedom to change your income each year. A life annuity gives you certainty and removes the burden of those decisions. Neither is universally better — they answer different needs. The relevant question is which one your particular retirement needs more.

Legacy vs longevity protection

A living annuity can leave capital to your family — but only if you don’t spend it down or outlive it. A life annuity protects you against outliving your money — but a basic version may leave nothing behind. This is the central tension of the whole decision, and most retirees feel it emotionally before they understand it financially.

How each is taxed

The income you receive from both a living annuity and a life annuity is taxed as ordinary income at your marginal rate, with PAYE deducted. The bigger differences appear at death. Living annuity capital generally passes to beneficiaries outside your estate and outside estate duty, with the beneficiaries taxed depending on whether they take a lump sum or continue an income. A single-life annuity simply ceases, so there is no residual capital to tax or to fall into the estate. Because the details depend on your circumstances and SARS rules can change, the tax outcome is something to confirm with a professional rather than assume.

Fees and cost considerations

A living annuity carries ongoing investment, platform and advice fees that compound over decades and directly affect how long the capital lasts. A life annuity’s costs are effectively built into the rate the insurer quotes — you see the income, not a separate fee line. Comparing the two on cost alone is difficult, which is why the comparison is so often done badly.

“The most common mistake is comparing a living annuity’s income plus its capital against a life annuity’s income alone — and concluding the living annuity always wins.”

The comparison mistake almost everyone makes

Here is the single most decision-distorting error. When people compare the two, they look at the living annuity and see “an income, and I still have my capital,” then look at the life annuity and see “an income, and my capital is gone.” Naturally the living annuity looks superior. But this compares two different things. To draw a comparable income safely and indefinitely from a living annuity, the capital must remain largely intact — it is not really spare money you also get to keep. The life annuity, meanwhile, has converted that capital into a higher, guaranteed income for life. Once you compare like income with like security, the gap narrows dramatically, and for some retirees it disappears.

The calculator below lets you enter a capital amount, age and drawdown rate to see this trade-off for yourself — the starting income each route could provide, and the path of the living annuity’s capital over time.

Why “either/or” is usually the wrong frame

Most retirees treat this as a binary: living annuity or life annuity, one box to tick. Experienced advisers and actuaries tend to ask a better question: which risks should you keep, and which should you transfer? Framed that way, the answer for many people is not one product at all.

The blended (hybrid) approach

A blended or hybrid annuity combines both within a single structure. Part of your capital secures a guaranteed income for life; the rest stays invested with the flexibility and legacy potential of a living annuity. You transfer the risks you most want gone and keep the freedom you most value.

What the actuarial research suggests

South African actuarial work has consistently pointed in the same direction: for a large share of retirees, a deliberate combination produces better and more resilient outcomes than going all-in on either extreme. The blend tends to reduce the chance of running out of money while still leaving room for flexibility and growth. It is closer to a structural default than a compromise.

A simple way to reason about the split

A practical starting point many advisers use: cover your essential, non-negotiable expenses — the food, medical aid, rates and electricity you must pay every month — with guaranteed life-annuity income, so those are safe for life regardless of markets. Then use a living annuity for discretionary spending — travel, gifts, the things you can flex in a bad year — where flexibility and legacy potential matter more. The exact split depends on your numbers, but the logic is sound and easy to live with.

The short video below walks through the trade-off as an adviser would explain it across the desk — ending on why a blend so often transfers the right risks.

The factors that should drive your choice

• ▸Your age and health. The older you are when you buy a life annuity, the higher the income it pays. Health and family longevity matter too — honestly assessed, not optimistically guessed.
• ▸How well-funded your retirement is. If your capital comfortably exceeds your needs, you have room for flexibility. If it is tight, guaranteed income that you cannot outlive becomes far more valuable.
• ▸Flexibility vs certainty. Be honest about which one will let you sleep at night. Both are legitimate; only you know which you weigh more heavily.
• ▸Your legacy goals. Leaving capital to family is a real objective — but it should not quietly become a reason to draw an unsustainable income from a living annuity.
• ▸The rate environment. Life annuity rates move with interest rates and bond yields. When yields are higher, the same capital buys a higher guaranteed income, which can make locking in some certainty more attractive.

Common misconceptions, corrected

How to approach the decision with an adviser

This is not a decision to make from a brochure or a single online quote. It draws together longevity, inflation, tax, your spouse’s security and your family’s future — variables that interact over twenty or thirty years. A few questions are worth raising before you sign anything:

• ▸What guaranteed income do I need to cover my essential, non-negotiable monthly expenses for life?
• ▸What is a genuinely sustainable drawdown rate for the flexible portion of my capital?
• ▸How do I protect my spouse if I die first — and what does that cost in income?
• ▸Does it suit me to secure a guaranteed income now, or to keep some flexibility and revisit later?

The aim is not to predict every market move. It is to keep your income, liquidity, tax and legacy goals working together — and to make a once-and-properly decision rather than a quick one you cannot take back.

Key takeaways

• ✓A living annuity offers flexibility, control and a possible legacy — but leaves you carrying investment, sequence and longevity risk.
• ✓A life annuity offers a guaranteed income for life and transfers those risks to the insurer — at the cost of flexibility, and often residual capital.
• ✓Don’t compare a living annuity’s income plus capital against a life annuity’s income alone — it’s the comparison that misleads most retirees.
• ✓For many South Africans a deliberate blend — guarantee the essentials, keep the rest flexible — is the most resilient answer.
• ✓You can move from living to life annuity, never back. Treat the life-annuity decision as permanent.

Frequently asked questions

About AS Brokers

AS Brokers helps South African retirees, business owners and families make better long-term financial decisions through retirement planning, retirement income, investments, risk management, estate planning and business assurance. Our focus is on the decisions that shape your future — not simply the products that sit beneath them.

Create wealth. Protect wealth. Preserve wealth. If you are weighing up how to draw your retirement income, speak to an AS Brokers adviser before committing to a decision you may not be able to reverse.

This article is general information for educational purposes and does not constitute financial, tax or legal advice. It does not take your personal circumstances into account. Investment values can rise or fall, and past performance is not a guide to future returns. Tax treatment and legislation can change. Please consult a qualified, authorised financial adviser before making any decision. AS Brokers CC is an authorised financial services provider, FSP 17273.