Stienemarié Bonsma-Potgieter, CFP® – Financial Planner

Retirement is a significant life transition that comes with many uncertainties and decisions. You need to consider your income needs, how you want to spend your time, and where you want to settle. Additionally, shifting from contributing to investments to drawing income from them requires a major mental adjustment. One of the key choices you’ll face is deciding between investing in a Living Annuity, a Life Annuity, or a combination of the two to provide your retirement income.

Let’s explore the advantages and disadvantages of both options to help you make an informed decision.

Living Annuities

Advantages:

• Income Flexibility: You can choose your income within the specified range of 2.5% to 17.5% of the capital value per annum.
• Annual Adjustments: You can review and change your income annually on the anniversary date to align with your changing needs.
• Investment Choice: You have the freedom to choose the underlying assets in your investment, tailoring them to match your portfolio, goals, and risk tolerance. You can also transfer between administration platforms should be dissatisfied with the service you receive.
• Tax Benefits: There is no tax on income or gains within the investment, although you will pay income tax (PAYE) on the income you withdraw.
• Beneficiary Nomination: You can nominate beneficiaries, ensuring that the capital goes directly to them upon your passing, falling outside your estate and avoiding estate duty and executor fees.

Disadvantages:

• Risk of Depletion: A high starting drawdown or large annual increases can deplete your capital over time.
• Market Volatility: Your investment is tied to market performance, and poor investment choices can negatively impact your capital and income.
• Longevity Risk: If you live longer than expected, you may outlive your capital.

Life Annuities

Advantages:

• Guaranteed Income: You are guaranteed an income for life.
• No Investment Decisions: Once the contract starts, you don’t need to make any investment choices. You can, however, decide on certain features at the outset, such as annual income increases, spousal benefits, and guaranteed terms.

Disadvantages:

• Lack of Flexibility: The terms of the initial contract are fixed and cannot be changed.
• Inflation Risk: If you do not opt for an income that escalates with inflation, your purchasing power may decrease over time.
• No Beneficiary Nomination: Upon your death, the remaining capital stays with the insurer, with no benefit to your heirs.

Choosing between a Living Annuity and a Life Annuity is a personal decision that depends on your unique situation and needs. It’s important to remember that while you can convert a Living Annuity to a Life Annuity at any time, the reverse is not possible. Consulting a financial planner can help you navigate these options and ensure the best possible outcome for your retirement.