Annuity: How to Convert Your Retirement Savings into Income

What Is an Annuity?

An annuity converts your lump sum retirement savings into a regular income stream, typically for life. You hand over your accumulated capital to an insurer or investment platform, and in return you receive monthly payments that fund your retirement.

In South Africa, you encounter annuities at the point of retirement. Once you leave a pension fund, provident fund, or retirement annuity, the law requires that you use at least two-thirds of your retirement fund proceeds to purchase an annuity. The remaining third can be taken as a cash lump sum, subject to tax. That mandatory two-thirds rule is why understanding annuities matters so much: the product you choose will shape your income for every year of your retirement.

There are two main types available in South Africa: the life annuity, which pays you a guaranteed income for life, and the living annuity, where you remain invested and draw an income you choose within regulated limits. The right choice depends on your age, your capital, your dependants, and your estate planning goals.

For a broader look at what an annuity is and how it works, and how it fits into retirement planning in South Africa, those articles go deeper on both topics.

How an Annuity Works

An annuity works by converting a lump sum of capital into an income stream. You transfer your retirement savings to an insurer or investment platform, and that institution pays you a regular income, typically monthly, either from a guaranteed pool or from your own invested capital.

The mechanics depend on which type of annuity you choose, but the underlying principle is the same: you are moving from the accumulation phase of your financial life into the decumulation phase. Accumulation is the years you spend building savings. Decumulation is the years you spend converting those savings into income.

Let me give you a concrete example. If you retire with R3 million and purchase a living annuity, you draw an income from that capital. At a 5% annual drawdown rate, that produces R150,000 per year, or R12,500 per month before tax. The capital remains invested, so growth in the underlying funds affects how long that income is sustainable. If markets perform well, your capital can grow even while you draw. If markets fall and you draw heavily, your capital erodes faster.

With a life annuity, the insurer takes your R3 million, and in return guarantees you a fixed monthly income for life, regardless of how long you live or how markets move. The monthly amount depends on your age, gender, interest rates at the time of purchase, and whether you include escalation or a spouse’s benefit.

Understanding which phase you are in matters for everything else: your fund choices, your tax position, and your risk exposure. The arrival of the two-pot retirement system has changed some of the saving-phase dynamics, though the annuity rules at retirement remain largely unchanged.

The Two Main Types of Annuity in South Africa

South Africa offers two primary annuity types at retirement: the life annuity and the living annuity. A third option, the blended or hybrid annuity, combines elements of both and suits retirees who want some certainty alongside some flexibility.

The Life Annuity

A life annuity pays you a guaranteed income for life. You surrender your capital to an insurer, and they carry the longevity risk. No matter how long you live, the income continues. You can typically choose whether the income is level, or escalates annually at a fixed rate or linked to inflation. You can add a spouse’s joint life benefit, so the income continues to a surviving partner after you die. Some products include a guaranteed payment period, meaning if you die early, the income continues to your estate or nominees for the remainder of that period.

The trade-off is clear: once you hand the capital over, it is gone. Nothing passes to your heirs at death beyond any guaranteed period that remains.

The Living Annuity

A living annuity keeps your capital in your name. You choose how it is invested across a range of underlying funds, and you draw an income each year within the limits set by the Financial Sector Conduct Authority (FSCA). Those limits are a minimum drawdown of 2.5% and a maximum of 17.5% of your annuity value per year, with the income reviewed annually.

You carry the investment risk and the longevity risk. If you draw too much or markets underperform, your capital depletes. The upside is that any remaining capital at your death passes directly to your nominated beneficiaries, outside your estate.

Hybrid and Blended Annuities

Some providers offer blended products that allocate a portion of your capital to a guaranteed life annuity income floor and the rest to a living annuity component. This can be a practical middle ground if you want partial certainty without sacrificing all flexibility.

For Muslim retirees, Shari’ah compliant investment options are available within the living annuity wrapper, using underlying funds that exclude interest-based instruments. On the life annuity side, Shari’ah compliant structures exist but are less widely available, so it is worth asking specifically.

Life Annuity vs Living Annuity: Which One Fits You?

Choosing between a life annuity and a living annuity is one of the most consequential financial decisions you will make at retirement. Neither product is universally better. Each suits a different set of circumstances.

The key trade-off is certainty versus flexibility. A life annuity gives you the peace of knowing your income will never run out, no matter how long you live or how badly the markets perform. A living annuity gives you control over your capital, and the possibility of passing wealth to your family, but it requires discipline in your drawdown rate and carries longevity risk.

If you are planning to retire abroad, the choice becomes more complex, with currency and tax implications to consider. The specifics depend on which country you move to and how your income is taxed there.

How Annuity Income Is Taxed in South Africa

Annuity income in South Africa is taxed as ordinary income. SARS treats your monthly annuity payment the same way it treats a salary: it is added to any other income you receive, and you pay tax according to the normal tax tables. There is no special flat rate or concessionary treatment for annuity income itself.

Take a straightforward example. If you receive R20,000 per month from a living or life annuity, that is R240,000 of income per year. Your tax liability depends on where that amount falls in the tax brackets for that year, less the applicable rebates. If that is your only income and you are under 65, you will owe income tax on the portion above the tax threshold. If you are 65 or older, a higher rebate applies, which reduces your bill materially.

Two additional points are worth knowing.

First, the retirement lump sum: when you retire, the one-third of your fund you can take as cash benefits from a sliding exemption. A portion of that lump sum is tax-free, up to a lifetime limit set by SARS. Any amount above that limit is taxed at progressively higher rates using the retirement lump sum tax table. Annuity income itself does not benefit from this exemption.

Second, retirees aged 65 and over benefit from an interest exemption on investment income. This does not apply to annuity income directly, but it can reduce tax on other savings you hold alongside your annuity.

Tax thresholds, rebates, and the lump sum exemption amount all change from one tax year to the next. Always verify the current figures on the SARS website or with a tax professional.

Drawdown Rates and Making Your Money Last

The central challenge of a living annuity is choosing a drawdown rate that keeps your income sustainable throughout your retirement. The FSCA permits a drawdown of between 2.5% and 17.5% of your living annuity’s value each year. Within that range, you decide, and the decision carries significant long-term consequences.

Consider R3 million in a living annuity at two different rates.

At a 5% drawdown, you draw R150,000 per year, or R12,500 per month. At a 10% drawdown, you draw R300,000 per year, or R25,000 per month. The monthly difference looks attractive, but the sustainability gap is enormous. At 10%, a sustained period of poor investment returns can deplete your capital within ten to fifteen years. At 5%, with reasonable underlying growth, the capital has a realistic chance of lasting thirty years or more.

There is no guaranteed safe drawdown rate, because your actual outcome depends on market returns over your lifetime, inflation, and how long you live. What experience does support is that drawdown rates above 6% to 7% carry meaningful depletion risk over a long retirement, particularly if early years see negative returns. This matters more than most retirees realise.

Annual reviews matter. The FSCA requires that your drawdown rate is reviewed each year on the policy anniversary. If your capital has grown, you may be able to maintain the same rand income at a lower percentage. If it has shrunk, the same percentage takes more out of a smaller pot.

Choosing the Right Annuity for Your Circumstances

The right annuity depends on your individual circumstances, not on which product is most popular or most marketed. Five factors do most of the work in that decision.

Age and Health

If you retire late or your health is poor, a life annuity tends to make more sense. Insurers price life annuities partly on longevity, and a shorter expected lifespan can result in a relatively higher guaranteed income. A living annuity, by contrast, rewards longevity, because the longer you live, the longer the capital must last. If you expect to live into your nineties, a life annuity may be poor value.

Capital Size

A very small capital base in a living annuity creates a precarious income. At the minimum 2.5% drawdown, R500,000 produces only R12,500 per year. A life annuity may produce more income per rand at smaller capital amounts. As a general rule, a living annuity works better when your capital exceeds R1 million.

Dependants

If a surviving spouse or dependants rely on your income, a joint life annuity provides for them automatically. A living annuity passes the remaining capital to beneficiaries, which may or may not be the better outcome depending on the amounts involved. This is especially important if you have a younger second spouse.

Other Income Sources

If you have a defined benefit pension, rental income, or other reliable income streams, you can afford to take more investment risk in a living annuity, because your basic needs are already covered. If your annuity is your only income, guaranteed certainty has a higher value.

Estate Planning Goals

If passing capital to the next generation matters to you, a living annuity is the only option that allows it. A life annuity ends with your death, unless you have chosen a guaranteed period or a spouse’s benefit.

GEPF pensioners occupy a specific position here. The GEPF pays a defined benefit pension that provides a guaranteed income for life. This changes the calculation considerably. A GEPF pensioner with separate retirement annuity savings has more freedom to use a living annuity for those savings, because the GEPF benefit already covers the certainty need.

This article provides general information, not personal financial advice. Your circumstances are unique. Speak with a financial advisor who specialises in retirement planning before committing to either product.

Frequently Asked Questions About Annuities

What is the difference between a life annuity and a living annuity?

A life annuity pays you a guaranteed income for life in exchange for your capital, which the insurer keeps. A living annuity keeps your capital in your name, invested in funds you choose, and you draw an income within the FSCA’s permitted range of 2.5% to 17.5% per year. The core trade-off is certainty versus control.

Can I switch from a living annuity to a life annuity?

Yes, you can convert all or part of a living annuity into a life annuity. This is often called a conversion, and it is a one-way door: once you move to a life annuity, you cannot reverse the decision. Many retirees do this later in retirement as their capital depletes and the certainty of guaranteed income becomes more important.

What happens to a living annuity when you die?

The remaining capital in a living annuity passes to your nominated beneficiaries, outside your deceased estate. This means it bypasses the estate administration process and is not subject to executor’s fees or estate duty in most cases. Beneficiaries can take the proceeds as a lump sum or continue drawing from the annuity.

Is annuity income taxed in South Africa?

Yes. Annuity income is taxed as ordinary income at your marginal tax rate. SARS treats it the same as a salary. The tax-free portion applies to the lump sum you take at retirement, not to the ongoing annuity income. Retirees aged 65 and older benefit from higher rebates and tax thresholds, which reduce their effective rate.

How much can I draw from a living annuity each year?

The FSCA allows you to draw between 2.5% and 17.5% of your living annuity value each year. The amount you choose is reviewed annually on the policy anniversary. If your capital grows, you can draw the same rand amount at a lower percentage, which increases sustainability.

What is the difference between a guaranteed and escalating annuity?

A level annuity pays the same amount every month for life. An escalating annuity increases the monthly payment each year by a fixed percentage or inflation rate, which means you start with a lower initial payment but your income keeps pace with rising living costs. Escalation is typically optional and affects the starting income rate.

Can I access my living annuity capital in an emergency?

Living annuities do not permit withdrawals outside the permitted drawdown range. You cannot make lump sum withdrawals. If you need access to capital, your only option is to increase your drawdown rate at the next annual review.

Should I choose a life annuity or living annuity if I have dependants?

If you have dependants who rely on your income, a life annuity with a spouse’s benefit or guaranteed period provides certainty that your income will not run out. A living annuity passes remaining capital to your beneficiaries, which may be valuable if you have significant wealth, but it carries longevity risk if your capital depletes before you die.

The Bottom Line on Annuities

An annuity is the mechanism that converts your lifetime of saving into retirement income. The single most important choice you face is between the life annuity, which offers certainty at the cost of capital, and the living annuity, which offers flexibility at the cost of risk. Neither is right for everyone, and for many retirees a blended approach makes more sense than a binary one.

Getting this decision right matters because it is largely irreversible. Once you have purchased a life annuity, your terms are locked in. A living annuity offers annual adjustments, but you cannot easily unwind the decision if you choose the wrong one.

Spend time thinking through your circumstances: your age, health, capital, dependants, and other income sources. These factors interact in ways that generic advice cannot always capture. Then sit down with a qualified financial advisor who specialises in retirement planning. The conversations you have now, before you retire, will shape your income security for decades to come.

Meta description: Understand how annuities work in South Africa. Compare life annuities and living annuities, learn how they are taxed, and find out which type suits your retirement.