In-fund or out-of-fund annuities: What’s the difference?

Carina JoosteLatest, Retire

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The choice of in-fund annuities or out-of-fund annuities only applies to  workplace-based funds. So, if you’re part of your employer’s pension fund or provident fund, your annuitisation options upon retirement would include in-fund annuities and out-of-fund annuities.

Wait, what?

Although both workplace funds, pension and provident funds are quite different from one another. Below is a reminder of the difference between pension funds and provident funds:

Pension fund: When you leave your employer or upon retirement, you’re only allowed to take a maximum of one-third of your pension as a lump sum. Like an RA, at least two-thirds of your pension needs to be converted into an annuity.

Provident fund: A provident fund provides a cash lump sum upon your retirement. However, if you’re under 55 years old, you’ll also only be allowed to take a maximum of one-third of your provident fund as a lump sum.

What is annuisation?

Converting the money in your retirement annuity, pension or provident fund into a series of periodic income payments is called annuisation. In other words, that minimum of two-thirds of your retirement annuity, pension or provident fund must be used to buy a guaranteed or a life annuity, or an investment-linked living annuity that will pay you in income every month.

In-fund annuities

When purchasing an in-fund annuity, your retirement capital stays where it is. In other words, it’s not moved from your employer’s fund to an external financial services provider.  That makes in-fund annuities as straightforward as they come: Your employer’s fund must offer a default annuity option and a maximum of four portfolios of varying risk. This offers a simple solution to those who do not wish to choose between a myriad of annuity options that are available out-of-fund.

On the downside, in-fund annuities have prescribed drawdown rates, offering less flexibility, and when you pass away, you, unfortunately, won’t have a say in how your wealth is distributed as that decision would be up to the fund’s trustees.

However, their benefits do pack a punch, as in-fund annuities come with much lower fees than retail annuities. Market timing risk is also avoided because you don’t have to sell out of the market when you stay in-fund. In addition, in-fund annuities help retirees navigate the unchartered waters of retirement with more confidence, as this new journey takes place in familiar territory: Their employer’s fund.

Out-of-fund annuities

Out-of-fund annuities offer options galore with a choice between countless life* and living annuities** offered by financial service providers, and drawdown rates are also more flexible. As opposed to the economies of scale that enables workplace-based retirement funds to offer the lowest fees, out-of-fund annuities are more expensive. And when you pass away, your listed beneficiaries will receive the remainder of your investment (this, however, is not applicable to guaranteed annuities).

*A life annuity is also known as a guaranteed annuity

**A living annuity is also known as an investment-linked annuity


Retire blog

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.