Upholding our mission of de-tangling complicated retirement investment concepts, products, and verbiage, we’re going to shed some much-needed light on annuities, and more specifically, living annuities.

Let’s recap the basics

When you are ready to cash out your retirement fund savings (and you are 55 years old or older) at least two-thirds of your retirement annuity (RA) or pension fund must be used to buy an annuity.

So what’s an annuity? It’s basically a financial product that will provide you with a steady income stream during retirement.

To start with, your options are pretty straightforward. You can either purchase a living annuity, a guaranteed annuity or both. Once you’ve bought a living annuity, you can switch it to a guaranteed annuity, but you cannot switch from a guaranteed annuity to a living annuity.

Guaranteed annuities

TL;DR: An insurance-type product that guarantees to provide you with an income for the rest of your life.

The nitty gritty: Guaranteed annuities are also known as life annuities. It can be purchased from a life assurance company—think Sanlam, Old Mutual, Liberty, etc.—and guarantees to provide you with a predetermined income for the rest of your life.

This means you won’t run out of money as a guaranteed annuity insures you against poor returns and the risk of outliving your money. The downside is that when you pass away, your policy dies with you. So any remaining cash won’t be passed on to your heirs.

Living annuities

TL;DR: An investment product invested in a range of funds held in the name of the annuitant from which a regular income is drawn – provided there is money in the annuity.

The low down: The investment world is truly your oyster with living annuities. Why? Living annuities are governed by the Income Tax Act, as opposed to the Pension Funds Act.  This means living annuities don’t have to be Regulation 28 compliant, and therefore, they’re not limited to where or how your savings are invested.

Living annuities thus give you the freedom to choose in which underlying funds to invest, your draw-down cadence (monthly, quarterly or yearly) and your draw-down rate – provided that’s not less than 2.5% or more than 17.5% of the total annuity value.

As opposed to a guaranteed annuity, a living annuity does not insure against investment risk or outliving your money – you might need to draw an income from a living annuity for 20 years or more.  However, living annuities are generally a great fit for individuals who are comfortable with investing and have an extra retirement income stream to fall back on when the markets are not performing as they should.

Where to start shopping for a living annuity?

As a living annuity is an investment product, they are available from the usual crowd of investment management companies and financial service providers – think Allan Gray, Ninety One, Discovery, 10X and the like.

Now although Regulation 28 isn’t enforced on living annuities, the industry is guided by the Standard on Living Annuities code issued by the Association for Savings and Investment South Africa (ASISA), which mentions that referencing the guidelines set by Regulation 28 might be helpful to assess the overall asset composition of a living annuity. However, the code is very clear that these guidelines shouldn’t be seen as a  substitute for getting professional advice.

The investment strategy behind a living annuity should take an individual’s specific personal circumstances into account: Their overall financial situation, e.g. the savings they have available, the lifestyle they’d like to maintain, medical costs, the needs of their dependents, etc.

Ultimately, the overall composition of a living annuity should be carefully considered to ensure one’s money keeps up with inflation, keeps growing, and keeps providing an income.

We wrote a post on choosing the right annuity here.

Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, Carina Jooste responds to common retirement questions, ranging from which products are best suited to different circumstances to efficient tax treatments.