Living annuities: don’t be misled by the starting income

20 July 2016
We are often asked by advisers how to compare the income that can be secured through a Just Retirement Enhanced With-Profit Annuity to the income that can be drawn from a living annuity.

It’s a good question, because the starting incomes from both options can be very close. However, how the future incomes compare as the annuitant ages is a very different story. It can be misleading to look at the starting income from a living annuity and make a decision on that alone.

We’ve prepared an example that illustrates how the incomes compare over time, based on the following assumptions:
  • Male, age 65
  • Purchase amount: R3 million
  • Inflation: 7.9%.
The tables below show exactly what happens to the income yield and the investment amount over 35 years.

The starting incomes at age 65 are comparable, but:
  • By the age of 70, a living annuitant is already over the 10% drawdown mark.
  • By the age of 75, the drawdown rate has hit the 17.5% cap, and the gap in income between the two products is beginning to widen.
  • By the age of 85, a living annuitant’s investment amount has dwindled to 37% of the original R3m, and his annual income, compared to 20 years ago, has decreased by R63 909 – right at the time when our retiree might need more money, not less, as he could be facing increased medical expenses due to failing health.
The graph below shows clearly that the living annuity drawdown cap is reached long before life expectancy.

In a recent survey that we conducted, 86% of retirees stated a clear preference for income security in retirement*. Investing 100% in a living annuity, in which annuitants run the risk of a reduced income and depleted savings, is clearly not a desirable option for the majority, and a Just Retirement Enhanced Annuity could be more appropriate. A Just Retirement Enhanced With-Profit Annuity will give your client a guaranteed income for life, no matter how long they live or what happens to investment markets.

We look forward to quoting for your clients!

Till next time.

*See “What retirees want vs what they are sold” at
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Rethink Retirement