Living annuity or life annuity?
The right choice could define your retirement
We explain why this decision deserves far more attention from retirees than it often receives.
By Wouter Fourie
CEO of Ascor® Independent Wealth Managers and co-author of The Ultimate guide to Retirement in South Africa
It requires understanding your goals, your risks, and the trade-offs involved. And it means working with someone you can trust to guide you through these choices.
When it comes to retirement income, one of the most important decisions you’ll face is this:
Should I choose a living annuity, a life (guaranteed) annuity, or a combination of both?
This choice can greatly influence the quality and sustainability of your retirement. And yet, many retirees make their decision based on incomplete information, product bias, or short-term thinking.
In this article, we’ll explore both options – the flexibility of a living annuity and the security of a life annuity – and explain why this decision deserves far more attention than it often receives.
What is a living annuity?
A living annuity gives you control. Once you transfer funds from your retirement savings into a living annuity, you decide:
How much income to draw (between 2.5% and 17.5% per year)
Where to invest the capital
Who inherits the remaining balance when you pass away
This flexibility is particularly attractive for retirees who wish to:
Manage their own drawdowns
Leave a legacy for their heirs
Adjust investments over time
However, with flexibility comes responsibility. If you withdraw too much or invest too conservatively, your capital may not last.
What is a life (guaranteed) annuity?
A life annuity, often offered by insurers, provides you with a guaranteed monthly income for life, no regardless of how long you live or how markets perform.
This income can:
Increase with inflation
Be structured to include a spouse’s benefit
Be fixed or variable, depending on the terms of the contract
It offers certainty, which can be invaluable, especially for covering essential expenses such as medical aid, rates and taxes, or food.
The trade-off? You typically give up access to the underlying capital, and there’s no legacy value unless specific guarantees are built in.
Why this decision is so important
At Ascor®, for example, we’ve seen how this single decision, often made quickly or under pressure, can shape a retiree’s experience for decades.
Choose a living annuity without proper planning, and you risk:
Drawing unsustainably and running out of capital
Being too conservative and losing value to inflation
Panicking during market downturns and making poor switches
Choose a life annuity without understanding the terms, and you might:
Lock in a low income for life without inflation protection
Lose the ability to leave assets to your family
Struggle with liquidity in emergencies
This isn’t just a financial decision, it’s a lifestyle one.
Blended annuities: A middle ground
Increasingly, we recommend that clients consider blending the two options:
Use a life annuity to cover essential, non-negotiable expenses (your “monthly minimum”)
Use a living annuity or discretionary investments to cover lifestyle costs and allow for flexibility
This approach can help balance:
Certainty and flexibility
Inflation protection and liquidity
Sustainability and legacy planning
Every client’s ideal ratio will differ, and that’s exactly the point. A personalised solution matters.
Questions to ask before you choose
Before selecting a retirement income strategy, ask yourself:
What are my essential versus discretionary expenses?
How long does my capital need to last?
What are my health and longevity expectations?
How important is it for me to leave a financial legacy?
Do I understand the risks associated with high drawdowns and low return assumptions?
Have I reviewed both options with a qualified, independent financial planner?
Already chosen a living annuity? There’s still time to adjust
Even if you’ve already retired and selected a living annuity:
You may be able to switch some or all of your capital to a life annuity
You can revise your drawdown strategy
You can rebalance your investment portfolio to better protect against inflation
You can review whether your current annuity provider and fund allocation remain appropriate
This isn’t about “right or wrong”, it’s about staying proactive.
In closing
Living annuity or life annuity – there’s no universally correct answer. But there is a right answer for you.
Making that decision means understanding your goals, your risks, and the trade-offs involved. And it means working with someone you can trust to guide you through those choices.
For more information about retirement, consider purchasing the best-seller book by Bruce Cameron and Wouter Fourie called The Ultimate Guide to Retirement in South Africa, now in its third edition, and visit www.retirementplanning.co.za
This article first appeared on moneyweb.co.za at https://www.moneyweb.co.za/financial-advisor-views/living-annuity-or-life-annuity-the-right-choice-could-define-your-retirement/
Contact Ascor®Independent Wealth Managers for retirement planning advice.
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