When planning for retirement, one of the most crucial decisions is how to structure your income during retirement. Two common options available are living annuities and life annuities. Both have distinct characteristics, benefits, and risks, making it essential for retirees to understand how they work before making a decision.

Before diving into the difference between the two options, we unpack some key points to consider first. In other words, which of the following factors are most important and which are less important to you at retirement?

Key considerations include – 

1. Income certainty – Do you need the security of a fixed/guaranteed income for life, or would you prefer the potential for an increase in income, knowing that your income could fluctuate? Do you want your income percentage fixed, or do you prefer setting it yourself each year?
2. Investment flexibility – Do you want the freedom to adjust your income and investment choices over time? Or are you comfortable with a fixed structure you cannot change once it’s set?
3. Risk – Would you rather manage the risk of how long your money lasts and how markets perform yourself, or would you prefer to hand that risk over to an insurer in return for a guaranteed income?
4. Inheritance – Is it important to leave remaining retirement capital to your heirs? Or is your main priority securing a lifelong income for yourself (and possibly your spouse/life partner)?
5. Growth potential – Would you like your retirement savings to stay invested with the chance of market growth? Or would you prefer the certainty of a fixed or inflation-linked income, even if growth is limited?
6. Taxation – Are you comfortable with your income being taxed as regular pension income? Would you prefer an option that allows beneficiaries to inherit without estate duty?
7. Estate planning (distribution and control) – Do you want your beneficiaries to continue receiving income from your retirement capital? Or are you comfortable with your income stopping at death (unless you’ve chosen a spouse’s pension or guarantee)?

Living Annuities

An annuity is an investment product used mainly at retirement. Instead of receiving a guaranteed pension from an insurer, a retiree invests their retirement savings in a portfolio of assets (such as equities, bonds, or unit trusts) and then withdraws an income from it. A living annuity offers investors a high degree of flexibility.

Investors have access to a wide range of investment funds, including those that are aligned with a specific house view and investment philosophy and risk levels.

Key features of living annuities include:

• Income flexibility: Investors can choose to draw income from one or more specific funds or proportionally across all selected funds. They can also switch between funds at any time.
• Income range: Income levels can vary between 2.5% and 17.5% of the investment value per annum.
• Tax efficiency: The income drawn is taxed at the investor’s marginal tax rate. There is no income tax on the policy itself, and no capital gains tax is applicable under current legislation.

Estate planning benefits:

• Investors can nominate primary and alternative beneficiaries, including natural persons or trusts.
• Upon death, beneficiaries may choose to receive benefits as a lump sum, an annuity, or a combination.
• Both lump sum and annuity benefits are free from estate duty, although lump sum payments may be subject to estate duty on excess contributions.

Life Annuities

A life annuity (also known as a fixed annuity) provides a guaranteed income for life, no matter how long you live. A life annuity is about security and certainty – it converts a retiree’s retirement savings into a steady, predictable pension for life, removing the risk of depleting the original retirement capital. It is purchased using compulsory retirement savings (e.g., from a pension fund, retirement annuity, or provident fund) through a financial institution or insurer.

Types of guaranteed annuities include:

• Fixed (level) annuity – which provides the same income every month for life.
• Escalating annuity – which provides an income that increases at a set percentage each year (e.g. 5%).
• Inflation-linked annuity – which provides an income that rises in line with inflation (CPI).

Key features of life annuities include:

• Guaranteed income: The insurer guarantees a fixed monthly income for the rest of the annuitant’s life, regardless of market conditions or investment performance.
• No investor control: The insurer makes all investment decisions, and the annuitant cannot change the income percentage, frequency, or fund selection once the annuity has been issued.

Risk management:

• The insurer assumes the investment risk and the longevity risk (the risk that the annuitant lives longer than expected).
• The income remains unchanged even during economic downturns.

Estate planning considerations:

• Life annuities generally do not leave capital for beneficiaries. In most cases, the policy terminates upon the death of the annuitant. However, if a guaranteed term is selected, income will continue to be paid to the nominated beneficiary until the end of the guaranteed period.
• In a joint life annuity, income will continue until the death of the last surviving annuitant.

Choosing the right annuity

The choice between a Living Annuity and a Life Annuity depends on an individual’s financial goals, risk tolerance, and estate planning preferences. Living Annuities are ideal for those who prefer flexibility, investment control, and the ability to leave a legacy. Life Annuities suit those seeking peace of mind through a stable, predictable income that lasts a lifetime, without the responsibility of managing investments.

A comprehensive retirement strategy may even include a combination of both annuity types to balance risk, flexibility, and income stability.

In closing

Deciding between a Living Annuity and a Life Annuity is not simply about comparing products – it’s about aligning your retirement income strategy with your lifestyle, values, and long-term financial security.

For many retirees, an effective solution is not an “either/or” decision, and it could be a careful balance between the two, blending the guaranteed stability of a Life Annuity with the flexibility and growth potential of a Living Annuity.

Because this decision has lifelong consequences, it’s essential to weigh each factor against your personal circumstances. A qualified financial adviser can guide you through these trade-offs, helping you design a retirement income plan that is not only sustainable but also gives you confidence and peace of mind for the years ahead.

Exhibit 1 | Comparison table – Living versus Life Annuities