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An annuity is a financial services product that provides a future regular income stream in exchange for an initial fixed contribution. Around the world, annuities are commonly used as a way to fund retirement. The term “annuity” is often misunderstood.

What could be seen as a misnomer, a retirement annuity is actually a pre-retirement tax-efficient savings product into which you invest a regular monthly or lump sum annual contribution while you are still working. A fixed term annuity is also an annuity that is not considered a retirement product, as it converts a fixed contribution into an income for a fixed period (e.g. five years).

Then there are post-retirement annuity products, which is what we are referring to when we use the word “annuity”. In South Africa, when you retire, if you are a member of a pension fund or have invested your own money over the years in a retirement annuity, you are legally required to use two thirds of your retirement savings to purchase a post-retirement annuity product, either a living or a life annuity (also known as a guaranteed or conventional annuity) or a combination of the two. These annuity products provide regular monthly income in retirement.

After purchase, you are no longer able to retract your decision i.e. get your capital back, so it is very important that you understand the small print before deciding which product is best suited to your individual circumstances.

Living Annuity

A living annuity is a product that is linked to an investment portfolio, which means that your income is determined by the performance of the underlying investments. It is a flexible solution that allows you to withdraw between 2.5% and 17.5% of your retirement capital annually. However, due to its reliance on market performance, your retirement income is not guaranteed and there is a risk that it could dry up too soon.   

Life Annuity

Life annuities give you a measure of comfort and safety by providing a guaranteed retirement income that will never reduce, regardless of what happens to investment markets or how long you live.

But which of these annuities provides the best possible retirement income for your needs – and how can you get the benefits of both?  Click here for a more detailed and visual comparison of life and living annuities.

Do you need more information?

Consider seeking advice from a qualified financial adviser. Contact us to request the details of an adviser in your area or to find out more about our offering.