Living annuities vs guaranteed life annuities: what is the difference?

At retirement, you’ll be faced with one of the most important decisions of your life, and it’s likely that you’ll have to have to choose between a living annuity and a guaranteed life annuity. Regardless of other investments you hold, if you belong to a retirement fund (this includes pension, preservation, provident or retirement annuity) you are obliged to use at least two-thirds of your savings to purchase an annuity to provide an income through your golden years. To prepare you for that future choice, let’s take a look at what these annuities entail and weigh up the pros and cons of both.

 

What’s the difference between a life annuity and a living annuity?

A life annuity guarantees a regular income for life but has no option to change the income on an annual basis, while a living annuity allows you to choose your income amount and adjust this annually, but gives no guarantee that your savings will last for the rest of your life.

 

What is a guaranteed life annuity?

Guaranteed life annuities pay a regular income for life and can be set up to include your spouse and dependents. Much like the name suggests, this is a product that guarantees an income for life so you never run out of money.

• Also called a lifetime income annuity, it’s a contract that you sign with an insurance company that converts a portion of your retirement savings into a dependable lifetime income stream. You can either start receiving this income immediately on retirement or set it to start paying out at a future date.

 

What are the pros and cons of a guaranteed life annuity?

• PRO: You’re assured an income for the rest of your life no matter how long you live, which means you won’t outlive your retirement savings.
• CON: You do not have the flexibility of changing the income drawdown amount; once calculated, this amount is fixed.
• CON: There is the risk of inflation and although these life annuities usually increase the income amount annually, there is no guarantee that these increases will keep pace with inflation

 

What happens to a guaranteed life annuity on death?

Your guaranteed annuity pays out for as long as you are alive. Once you die, your capital dies with you and there will be nothing to pass on to your heirs.

 

Can you cash out a guaranteed life annuity?

No, it is not possible to withdraw your life annuity funds, nor can you cancel or surrender. It is only possible to cash out your annuity if your residual capital drops below R75 000, or below R50 000 if you exercised your withdrawal benefit to take one-third of your funds as a lump sum at retirement.  This is based on current legislation and is subject to change should regulation be amended.

 

What is a living annuity?

A living annuity is an investment product that allows you to determine your annual income drawdown at a rate of between 2.5% and 17.5% per year. You can choose your income frequency ( monthly, bi-annual, quarterly or annual) and you can adjust your drawdown percentage once a year on the anniversary date of your investment.

 

What are the pros and cons of a living annuity?

• CON: Because it’s an investment that’s market-linked, performance will depend on the underlying investment portfolio.
• PRO: You can choose how much you want to draw as income annually and you can change this once a year if you need to draw more.
• PRO: Capital remaining can be inherited by your beneficiaries when you pass on.
• CON: Income is not guaranteed for life, and there is a chance that you could outlive your savings.
• PRO: You get the flexibility of being able to invest 100% in offshore investments. 

What happens to a living annuity on death?

If you keep the drawdown rate below the growth rate of the linked investment portfolios,  it is possible to have enough capital remaining to provide an inheritance for your dependants on your death.

 

Can I cash out a living annuity?

Unfortunately, legislation does not permit you to withdraw a living annuity in full. This is only possible where the invested value drops below R125 000, subject to tax.

 

FinGlobal: financial services for South African expats

Choosing the right product to provide for your retirement can be tricky, but choosing a cross-border financial services provider shouldn’t be. FinGlobal is a name you can bank on and we’re ready to help you transfer your retirement/ pension income abroad so that you can live your best retired life, without worrying about admin and paperwork. We’re also equipped to help you with all aspects of tax as an expat, including handling any  tax refunds you might be due and any other tax-related queries you might have.

To see how FinGlobal can help you get your money where you need it to be, leave your contact details and we’ll be in touch to discuss your requirements.