Retirement income planning

You’ve likely spent decades saving towards financing a better later life. But as you near retirement, deciding how to allocate your savings is crucial, as your choices will impact the retirement you’ve worked so hard for. 

In South Africa, as the Income Tax Act requires, you must decide whether to use at least two-thirds of your pension fund or retirement annuity (RA) to purchase a life annuity, a living annuity or a blended annuity, which is a mix of the two. But, with all the options on the table, it may be difficult to know which product gives you the best possible retirement income that is suited to your individual circumstances.

At Just SA, we believe making the best decision for your needs has much to do with understanding the difference between two distinct financial products: insurance and investments. Each has its own trade-offs, which is why confusing the two could mean either outliving or losing your money, or locking yourself into a retirement income product that doesn’t match your needs in later life.

In this article, we will unpack this difference and what it means in the context of retirement income vehicles in South Africa: life, living, and blended annuities. We hope this will give you a better understanding of how your choices today may impact your plans, goals, and dreams for retirement in the future.

As always, when considering retirement, the first and most important step to consider is to consult a qualified financial adviser. They will help you understand your retirement options better and provide a clearer view of what you will need, based on your unique circumstances. 

Let’s dive in by looking at the distinction between insurance and investments. 

Insurance versus investments

Insurance and investments are essential financial tools that serve different purposes. 

• Insurance: Insurance is all about securing yourself against risk and unexpected events. It is a safety net, such as medical aid or car insurance, offering the certainty that you’ll be covered if you have a bad fall or are involved in a serious car accident. While it may sometimes feel like a grudge purchase, the insurance you buy provides peace of mind. 

• Investments: Investment is an allocation of money or resources into an asset (such as stocks or bonds) with the expectation of generating more capital value over time. As with all investments, however, you are susceptible to risks: your investment may not deliver the returns you plan for or rely on. 

Now, let’s take a wider view of insurance and investments to put their difference into context. This will help as we illustrate how things play out when deciding which income vehicle to purchase at retirement.

How insurance and investments shape the world

When the global financial system works well, it can feel invisible, like a quiet engine powering everything behind the scenes. And, for better or worse, the world of insurance and investments plays a massive role here. They aren’t just personal financial tools — they’re among the most significant forces driving the global economy.

• Insurance brings security by pooling risks across groups of people or businesses, safeguarding them from loss and uncertainty when unexpected events strike. 

• On the other hand, investments potentially bring more value — and risk — using capital to increase its value over time.  

Together, these two systems function to fuel economic progress in different ways. When things are going well, you benefit — a good economy trickles down in ways that secure your financial position: 

• Your money goes further

• The value of your pension remains strong 

• Interest rates work in your favour

• Your overall financial security in retirement improves

But when things go wrong, particularly on the investment side, the inherent risks can cause significant problems — over the last 50 years, the investment world has often been the flashpoint that triggered economic downturns.

What the 2008 global financial crisis reveals about the nature of investments and insurance

The 2008 global financial crisis is a stark reminder of what happens when one part of the system — the investment part — collapses. It started with investment products tied to mortgages in the US housing market, a traditionally ‘safe’ investment with, supposedly, no downside risk — or so everyone thought. When those bad investments, sold as ‘good investments’, failed, panic spread throughout global markets, freezing credit, crashing markets, and sending shockwaves worldwide.

And while some insurers felt the impact, the crisis revealed something important: insurance proved to be one of the few tools available that could offer real protection and peace of mind when things became uncertain. 

Yes, certain large insurers were exposed to failing investment assets, but many annuity providers — life insurance companies — stood firm, honouring their guarantees, and continued providing income to retirees. Meanwhile, holders of investment-linked retirement income products took a major hit, and watched as the value of their retirement funds shrank overnight.

It was a painful wake-up call — a reminder that when you need it, insurance is invaluable. 

Let’s discuss how some of the same underlying dynamics illustrated in this example — between investments and insurance — unfold when it comes to retirement income products in South Africa. 

How the difference between insurance and investments plays out with retirement income products 

Let’s look at the contrasting retirement income products in South Africa in terms of insurance vs investments. It is helpful to compare them in this way because of the manner in which each product generates retirement income. This should help you better understand which of the three options may be the best fit for your financial needs in retirement.

Life annuities 

Life annuities are a type of insurance — a security against the risk of running out of money, what we call longevity risk in the retirement world. Many life annuities are also indirectly a security against investment risk, which is the kind of risk we illustrated using the 2008 crash in the previous section. In fact, life annuities are designed to provide security against all four of the risks in retirement (longevity, investment, inflation, and behavioural risk).

Also known as guaranteed income, life annuities can only be bought from registered life insurance companies, and what you buy is the peace of mind of guaranteed income for life, no matter what happens in the financial markets, or how long you live: 

• You pay a lump sum to an insurance company at retirement.

• The insurance company in turn pays you a fixed income for the rest of your life — this payment will never decrease, even if markets crash like they did in 2008. 

• Your starting income depends on your age, gender, purchase sum and chosen annuity type.

• You cannot change your income structure after buying the annuity, and it cannot be cancelled.

• Payments usually stop when you die, unless you have selected specific options such as a guaranteed period or spouse’s benefit.

Living annuities 

In contrast, living annuities are a type of investment. If you purchase a living annuity, your retirement savings will be invested in a range of underlying assets which are bought and sold by investors on financial markets. As such, living annuities inherently leverage market and investment risk to provide capital appreciation so you can draw a retirement income. 

It is important to understand that although living annuity portfolios often include ‘safe’ underlying investments, you always carry investment risk. If, for whatever reason, your investments lose value — as happened for many people in 2008 — your income may be affected. 

To wrap up:

• You buy units in underlying assets such as stocks and bonds.

• The value of your annuity depends in part on the size of your savings pot and the growth expectation.

• The sustainability of your retirement income depends on how much and how quickly you draw from this pot over time.  

• Your income also depends on the performance of your underlying investments. As we’ve explained, if your investments perform negatively, your income could decrease or not last as long, as the capital is eroded by negative returns.

Blended annuities 

The best of both worlds can be found in a blended annuity, which combines guaranteed income — insurance against the risk of running out of money — with living annuity income, which is flexible and is subject to capital growth. 

You can use a blended annuity to secure a fixed, guaranteed income to cover essential expenses, while still allowing investment exposure for a portion of your savings. 

• The guaranteed income portion — the insurance side — provides peace of mind through an income that's secured for life.

• The living annuity portion — the investment side — offers the benefit of capital appreciation and the opportunity to leave a legacy, but is still exposed to investment risk.

This unique solution provides both certainty through a lifetime income guarantee and the benefit of capital gains. Remember, the investment risks associated with living annuities we discussed would still apply to your living annuity portion. Therefore, it would be up to you to decide how much of your retirement benefit you will expose to investment risk through the living annuity portion. 

We’ve discussed how insurance and investments work in the context of retirement income in South Africa. Now, let’s take a look at some of the behavioural dynamics typically associated with insurance and investment. 

Behavioural dynamics:
investors vs policyholders

As with all things involving money, human behaviour affects retirement income planning outcomes. Understanding how human behaviour impacts financial outcomes in retirement is as important as understanding the products themselves. 

Very different behavioural dynamics influence investments and insurance, and these differences can significantly affect outcomes. For instance, investor behaviour is often driven by emotion. Fear, overconfidence, herd mentality, and loss aversion can lead to irrational decisions — selling at the bottom of the market, chasing returns, or abandoning a long-term plan at the first sign of volatility. 

These behavioural biases mean that investment outcomes are not only subject to market risk, but also to unpredictable human behaviour. And unlike financial risks, behavioural risks are impossible to plan for — even the best strategy can be undermined by panic or short-term thinking. So, if your retirement benefit is wound up in this arena — in financial markets — you must be ready for these behavioural dynamics and, by extension, the fact that you can’t plan for or mitigate them when they occur. 

With insurance products such as life annuities, the behavioural risks are different and more manageable. People may still misjudge their needs, either under- or over-insuring against retirement risks such as longevity and/or inflation risk. But both insurers and financial advisers have a unique role to play here. Product providers should guide policyholders towards better decisions by offering clear product information, education and behavioural guidance, and an adviser can offer personalised advice for your individual circumstances. With the proper support, these behavioural pitfalls can be anticipated and planned for, making insurance a more secure, structured solution for those seeking long-term financial security.

Now that we’ve unpacked the core differences between life, living, and blended annuities — and the investment vs insurance-related behavioural dynamics that underpin them — the final question comes down to this: 

What’s your appetite for risk?

It often comes down to your risk appetite

The truth is, when choosing a retirement income product, you’re not just picking a provider. You’re picking a financial philosophy — one that defines how your income behaves over time. So it’s worth seriously investigating your relationship, position, and overall outlook towards both security and growth.

If, for instance, you value security above all else — if the thought of your retirement income rising and falling with the market keeps you up at night — a life annuity may be the right choice for you. Yes, it may feel more rigid, but what you get in return is certainty. No matter what happens in financial markets, or how long you live, your income is guaranteed for both you and your significant other, should you choose a spouse’s benefit.

If, on the other hand, if you’re comfortable taking on more risk — either because you’ve built up a sizeable retirement pot, or you understand markets and you’re confident about making investment decisions even well into your later years — then a living annuity may suit you. What you get in return is flexibility: you control your withdrawal rate, you benefit from potential capital growth, and you can adjust your income annually. But remember, this approach is not risk-free. If the markets perform poorly or you withdraw too much too soon, your capital and income could run out.

And if you sit somewhere in the middle — valuing the security of guaranteed income, but not wanting to miss out on the growth that potential investments offer — then a blended annuity is the best of both worlds. You could secure a base income to cover essential expenses through the guaranteed portion, while allowing the remaining portion to benefit from investment exposure. It’s about balance — and deciding how much certainty and potential gains you want built into your retirement income plan.

Ultimately, understanding your own risk appetite — and how much uncertainty you can reasonably afford or tolerate — is key to making the best decision.

We hope this exploration of insurance and investments and how they shape your retirement income options has given you some clarity. As always, we strongly recommend speaking with a qualified financial adviser. They can help you assess your needs, align your risk appetite with the right product, and give you peace of mind that your retirement plan is built for the long haul.