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Choices choices … living annuity or conventional life annuity?

In a lot of cases it would be most beneficial to have a combination of the two.

There are many factors to consider as retirement approaches. Selecting the best vehicle to provide income through retirement is most definitely one of the most important decisions to make. An incorrect choice may have dire consequences. In view of the much longer life expectancy of modern times, proceed with caution … and sound, professional advice.

There are two common options, each with particular benefits and, depending on the requirements and goals of a particular retiree, shortcomings. It is important that investors understand the differences and make the appropriate choice.

An investment-linked life annuity (ILLA) is a unit trust-based investment, with an underlying investment structure from different asset managers (Coronation, Investec, Allan Gray, etc.). A key consideration to bear in mind is making the right choice for optimal growth at the lowest risk.

The investor has a choice of income level between 2.5% and 17.5%, which can only be reviewed (changed) once a year upon the anniversary of the investment. The higher the income percentage drawn from the investment, the higher the real possibility that the investor will deplete all capital before dying. Thanks to medical advances and generally healthier lifestyles, this is a real concern. Numerous research documents have shown that should an investor draw more than 5% from such an investment, the risk of depleting the investment is particularly high.

Neither the income earned nor the investment growth is guaranteed.

In the event of a conventional life annuity (guaranteed life annuity) the investor (annuitant) purchases a life annuity (LA) from an administrator at a specified and guaranteed income rate, payable for the rest of his/her life. The income rate is determined by considering different factors including:

  1. The age of the annuitant – the younger, the lower the income rate.
  2. Gender – women, on average, have a much higher life expectancy and therefore receive a lower income rate.
  3. Interest rates – the higher the rate, the higher the income rate.
  4. The type of annuity selected – choosing an annuity with a guaranteed period or a joint life, will pay a lower income rate.


The administrator (insurer) takes the investment risk and the risk on the life expectancy of the investor. The administrator is obliged to pay the specified income even in poor market conditions.

The annuitant has a choice to lock in a guaranteed period for the income payments at the onset of the investment. Should he/she die before the term ends, the income will be paid to the investor’s chosen beneficiary until the end of the term. If no term is selected, the income will cease to be paid upon the death of the person whose life was insured. There is an option to add two lives to the LA, in which instance the income will be paid until the death of the second life insured or the end of the guaranteed term – whichever is the longer.

The annuitant does not have a choice in the underlying funds, the insurer will invest the money at its discretion and according to its house view and mandates.

Key factors to consider:

  • Can I use my discretionary money to invest in these?

In both instances you can only use funds originating from retirement funds (RAs, preservation funds, provident and/or pension funds) The rules of the fund must allow a transfer to an LA and/or guaranteed annuity.

You can purchase your initial investment from multiple retirement fund sources, but keep in mind that you can only add to an ILLA at a later stage; it is not allowed to make additional investments to a guaranteed annuity.


  • I have a living annuity; can I convert it to a conventional life annuity?

You can transfer an ILLA to a guaranteed annuity or to another administrator. However, you cannot transfer a guaranteed annuity to an ILLA or to another administrator.


  • Access to the funds in the investments before death or at divorce

The funds cannot be divided in case of a divorce, but the income can be considered in the negotiations of maintenance payments. The funds in an ILLA are only accessible in the event where the fund value is below R75 000 (where no commutation was made initially) or below R50 000 (if there was a commutation made initially). The lump sum withdrawn will be taxable. A life annuity is not accessible at all during the annuitant’s life.

  • Options at death

Income payments [cease] at death in the case of an LA. If the annuitant did not nominate any beneficiaries the lump sum will be paid to his estate and be subject to tax. Nominated beneficiaries have the option to either take a lump sum (taxable in the hands of the deceased annuitant) or they can transfer their portion to their own ILLA, in which case the income will be taxable in their hands.


With a life annuity if there is no guarantee period selected or no second annuitant, the income payments will cease at death and the balance of the annuity is the property of the insurer.

If there is a guarantee period selected, the income will continue to be paid should the annuitant die before the end of the term. The annuitant can select a beneficiary for such income payments. If the contract is a joint life contract, the income will continue to pay until the death of the last survivor.


Putting the two options side by side, an ILLA provides more flexibility but at a higher risk premium. If you have enough retirement money to sustain your lifestyle with minimum changes, or perhaps are a younger retiree, with children still studying or still need to pay for events like say a wedding, the flexibility and option for a higher initial draw-down available in the LA might be the better option. If you have minimal capital which will most likely not be able to last you your whole life it is worth your while to look at the life annuity option instead.

In a lot of cases it would be most beneficial to have a combination of the two, where an ILLA may increase in value due to market growth, allowing for a higher income. The life annuity would, on the other hand, guarantee a stable monthly income for life with very little (or even no) risk attached to it.



Life/guaranteed annuity

Linked living annuity

Higher initial income



Inflation linked income


Not guaranteed

Life-long income


Not guaranteed




Leave to beneficiaries

Not necessarily




Transaction and on-going fees


These choices can only be made with proper financial planning, where you consider your individual needs, health, age, goals and objectives, with the help of a professional financial adviser.


Suzean Haumann

Brenthurst Wealth Management (Pty) Ltd


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