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Where will the money come from?

IN SHORT: Post-retirement you must invest at least two thirds of your pension to receive a monthly “salary”. Three vehicles are available: a living annuity, a life annuity or a blended annuity. Your choice depends on your risk appetite, need for flexibility and how long you think you’ll live.

When you retire you must move two thirds of your retirement savings into another investment vehicle, called an annuity. In general, an annuity pays you a regular income or pension during your retirement. Typically, you can choose between:

  1. A living annuity
  2. A guaranteed life annuity
  3. A combination of the two

You’ve probably heard the term “annuity” before. A living or life annuity should not be confused with a retirement annuity. A retirement annuity is a tax-efficient savings product into which regular monthly or lump-sum contributions are made before retirement.

A living or life annuity provides a regular income stream after you retire. They are post-retirement annuity products. You don’t have to invest all your retirement savings in one company – you can split them between various companies and products. Keep in mind, this can only happen at retirement, not during.


Life Annuity

A life annuity is a policy with a life insurance company. Your monthly income consists of a guaranteed base amount plus a yearly increase. The guaranteed amount never changes, even in the event of a market crash or if you live much longer than you expected.

You must decide how your yearly increase is determined. Life annuities are available in two basic forms:

For a with-profit guaranteed life annuity, the insurance company pools funds from all the annuity holders and invests them in a balanced fund. The long-term performance of this underlying investment determines your yearly increase. If the investment performed well over time the income increase will be high, but if it performed poorly the increase will be low or even zero.

Non-profit guaranteed life annuities, such as inflation-linked or fixed-escalation annuities, provide a guaranteed increase equal to inflation or the selected fixed rate, which usually ranges from 1% to 10%.

  • Guaranteed monthly income for life.
  • Death benefit options for partner and/or beneficiaries.
  • Base amount never decreases.
  • Various ways to protect against inflation.
  • Little flexibility. Once you opt in, you can never opt out – so choose your service provider wisely.


Living Annuity

A living annuity is an investment portfolio with an investment company; therefore, your income is dependent on the amount invested and the performance of the underlying investments. It is subject to some regulations.

  • It’s flexible – Every year you can choose what amount you want to withdraw of your capital – within a range of 2,5% and 17,5%. This is called a drawdown rate. In effect, you get to choose your yearly income.
  • Any capital can be left for beneficiaries.
  • Can be transferred to another investment company or into a life annuity.
  • Since it is reliant on market performance, your retirement income cannot be guaranteed. There is a chance that you may eat into your capital too quickly and run out of money before you die.


Let’s go on a journey with Grace who is retiring in six months. She has retirement savings worth R3 million. She draws a lump sum of R1 million, pays off her home loan, and reinvests the remaining R2 million in a post-retirement annuity.

Let’s say, based on her age, health and the prevailing interest rates, the insurance company offers her a starting income rate of 7% per year. The graph below illustrates the difference over three years between a life and living annuity (if Grace chooses a drawdown rate of 5%).




  Economic environment With-Profit Inflation-linked 5% drawdown
Year 1 The economy grows steadily

R14 130 per month


Purchase amount: R2 million

Age 65, female

Single life




R11 665 per month


Purchase amount: R2 million

Age 65, female

Single life




R8 333 per month

R2 million x 5% = R100 000

Investment growth of 6%:

R2 000 000 = R120 000

End-of -year Investment Value: R2 000 000

+ R120 000

– R100 000 =  

R2 020 000

Year 2

The economy chugs along and inflation rises to 5%.


Grace faces unexpected medical expenses and needs more income to cover these costs.  


R14 412 per month

The investments performed well, and the company declares an annual increase of 2%.

(R14 130 x 2%)


R12 248 per month

(R11 665 x 5%)


R13 466 per month

New Drawdown Rate: 8% of R2 020 000 = R161 600

Investment Growth of 6%: R2 020 000 = R121 200

End-of-year Investment Value: R2 020 000

+ R121 200

– R161 600=

R1 979 600

Year 3

A war breaks out that impacts the SA economy. Investments struggle and inflation rises to 8%.













R14 556 per month

The investments don’t fare well and there’s only a

1% increase.

(R14 412 X 1%)  








R13 228 per month




(R12 248 X 8%)  









R9 898 per month

Grace reduces the drawdown rate to


6% of R1 979 600 =

R118 776

Investment Growth: 5% of R1 979 600 = R98 980

End-of-year Investment Value: R1 979 600

+ R118 776

– R98 980  

R1 959 804

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