What Are Annuities? A Plain-Language Guide for South Africans

What Are Annuities? The Short Answer

An annuity is a financial product that converts your retirement savings into a regular income, paid monthly, for either a fixed period or the rest of your life.

When you reach retirement age and have money in a pension fund, provident fund, or retirement annuity, South African law generally requires you to use at least two-thirds of that money to purchase an annuity. The annuity then pays you a monthly income to live on.

There are two main types available in South Africa: a living annuity, where you stay invested and choose your own drawdown rate, and a life annuity, where an insurer guarantees you income for life in exchange for your capital. The difference between them matters enormously. The choice you make at retirement is largely irreversible, so understanding how each one works is critical before you decide.

This guide covers how annuities work, which type may suit you, how your income is taxed, and what to watch out for. For a broader overview of retirement planning in South Africa, that article is a good starting point. For a direct comparison of the two main product types, see the living annuity versus life annuity guide.

How an Annuity Works

An annuity works by taking a lump sum of retirement capital and turning it into a recurring income stream. You hand over a portion of your savings, either to an insurer or to an investment platform, and in return you receive regular payments.

In South Africa, the two-thirds annuitisation rule applies to most retirement funds. When you retire from a pension fund, provident fund (for contributions made before March 2021), or retirement annuity, you must use at least two-thirds of the fund value to buy an annuity. You may take the remaining one-third as a lump sum in cash, subject to tax. If your total fund value is below a certain threshold set by SARS and reviewed periodically, you may be allowed to take the full amount as a lump sum instead.

Once the annuity is in place, your income is paid monthly. The amount depends on which type of annuity you chose, how much capital you invested, and in the case of a living annuity, the drawdown rate you selected.

Let me give you a concrete example. If you retire with R3 million in a retirement annuity, you could take up to R1 million as a lump sum (subject to tax) and use the remaining R2 million to purchase an annuity. How much monthly income that R2 million generates depends entirely on the product and structure you choose. For a more detailed worked example, see what monthly income to expect from R2.9 million.

For a fuller explanation of how the savings phase works before retirement, the article on how retirement annuities work in South Africa covers that ground in detail.

The Two Main Types of Annuity in South Africa

South Africa offers two primary annuity structures at retirement: a living annuity and a life annuity. Both serve the same purpose, providing retirement income, but they work very differently and carry different risks. The choice between them will shape your retirement income and your family’s inheritance for decades.

Living Annuity

A living annuity is a retirement income product where your capital remains invested in underlying funds, and you draw an income from it each year. You choose where your money is invested and set your own drawdown rate, which is the percentage of your remaining capital you take as income each year.

SARS and the Pension Funds Act limit the drawdown rate to between 2.5% and 17.5% per year. You can adjust it once a year on your policy anniversary. The real risk here is simple: if your drawdown rate is too high relative to your investment returns, you will deplete your capital while you are still alive.

On the positive side, any remaining capital passes to your nominated beneficiaries when you die. This is one reason the living annuity is popular among retirees who want to leave something to their children. It also offers flexibility in how your money is invested, and Shari’ah compliant living annuity portfolios are available from several South African providers, making this option accessible to Muslim retirees who require interest-free investment structures.

Life Annuity

A life annuity is a retirement income product where you hand your capital to an insurer in exchange for a guaranteed monthly income for the rest of your life. You cannot get your capital back, and it does not pass to your beneficiaries unless you have selected a joint life or guaranteed period option.

The advantage is straightforward: certainty. You know exactly what you will receive each month, regardless of how long you live or what markets do. The disadvantage is equally clear. The income is fixed (unless you selected an escalating rate), and the capital is gone.

Some insurers offer Shari’ah compliant life annuity structures, though availability is more limited than in the living annuity space.

For more on how these two products compare in an income context, see annuity income at retirement and the plain-language guide to what is an annuity.

Living Annuity vs Life Annuity: A Side-by-Side Comparison

The core trade-off between living and life annuities is flexibility versus certainty. The table below captures the key differences so you can compare them directly.

The central trade-off is this: a living annuity gives you flexibility and preserves the right to leave something to your family, but it requires active management and carries the real risk of running out of money. A life annuity removes that risk entirely but surrenders your capital permanently.

If you plan to retire abroad, the living vs life annuity when retiring abroad article addresses the specific complications that arise. For context on what a guaranteed rate actually means in a life annuity, see guaranteed annuity rate explained.

How Long Will Your Annuity Income Last?

How long your annuity income lasts depends almost entirely on whether you chose a living annuity or a life annuity, and if the former, what drawdown rate you set.

A life annuity lasts your entire lifetime by definition. The insurer takes on the longevity risk. Whether you live to 75 or 100, the income continues.

A living annuity is different. The sustainability of your income depends on two things: your drawdown rate and your investment return. If your portfolio earns 9% per year and you draw 5%, your capital should grow in real terms over time. If you draw 12% and your portfolio grows at 8%, your capital will shrink each year. At that rate, you could deplete your savings within a decade.

The Pension Funds Act sets the drawdown limits at a minimum of 2.5% and a maximum of 17.5% per year. These limits exist precisely to prevent retirees from exhausting their capital too quickly, though even within these limits, poor choices can cause significant problems.

Consider this illustration: if you have R2 million invested and you draw at 7.5% per year, your annual income would be R150,000, or R12,500 per month. Whether that capital lasts 20 years or 30 depends on the investment returns you achieve and whether you increase your drawdown over time.

The lower your drawdown rate in the early years of retirement, the more time your capital has to grow. Most financial planners consider anything above 6.5% to 7% in the current environment to be a drawdown rate that warrants careful monitoring.

Use the retirement planning calculator to model different scenarios with your own numbers.

Tax on Annuity Income in South Africa

Annuity income is taxed as ordinary income in South Africa. Every rand you receive from either a living annuity or a life annuity is added to your taxable income for the year and taxed at your marginal rate.

SARS applies the standard personal income tax tables to annuity income, and those tables are revised in each annual Budget. You are entitled to the primary and secondary rebates, and if you are 65 or older, you also qualify for the aged rebate, which reduces the amount of tax you pay. The specific rand thresholds change from year to year, so always check the current figures directly with SARS or through your financial adviser.

The lump sum you take at retirement is taxed differently, under the retirement lump sum tax table, which applies lower rates for the first portion of the lump sum. This is a once-in-a-lifetime calculation across all retirement funds, so the order in which you access different funds can affect your overall tax bill.

Here is a practical point that matters: if your total annuity income falls below the tax threshold for your age group, you may owe no income tax at all. However, this threshold is not something you can rely on indefinitely if your income grows over time.

For guidance on structuring your retirement tax position properly, the article on financial advice for retirement planning explains when and why professional advice adds real value.

Who Should Consider an Annuity?

Essentially every South African who has saved in a formal retirement fund will deal with an annuity at retirement, because the law requires it. But the decision about which type of annuity to purchase is not automatic, and it deserves careful thought.

If you are a GEPF member (that is, if you work in the public sector and contribute to the Government Employees Pension Fund), your situation is slightly different. The GEPF pays a defined pension directly to you on retirement, and you do not purchase an annuity on the open market. However, if you have additional savings in a retirement annuity or preservation fund, you will need to make an annuity decision for those funds.

If you are risk-averse, in poor health, or have no dependants who need an inheritance, a life annuity may suit you well. The certainty of income regardless of market conditions has genuine value, particularly if you do not want to actively manage your retirement portfolio.

If you are in good health, want flexibility, and have dependants who would benefit from inheriting your capital, a living annuity is worth serious consideration. You will need to manage your drawdown rate sensibly and keep your investment strategy appropriate for your age.

Talking through your specific situation with a qualified professional is worthwhile. The guide on finding a financial adviser for retirement planning covers what to look for and what questions to ask.

Other Annuity Structures Worth Knowing

Beyond the living annuity and life annuity, there are a few additional structures you may encounter.

A fixed annuity pays a set income for a defined period rather than for life. It is less common in South Africa as a primary retirement product but may appear in certain insurer offerings. For details, see the fixed annuity explained article, and for specific product variations, the annuity fixed options guide goes further.

A with-profit annuity is a variation of the life annuity where your income can increase over time based on the investment performance of the insurer’s bonus pool. The starting income is typically lower than a conventional life annuity, but the income may grow if bonuses are declared. The insurer does not guarantee that bonuses will be paid, so you trade some certainty for the possibility of income growth.

A blended annuity combines a life annuity and a living annuity, splitting your capital between the two. This approach is increasingly popular as a way to get a guaranteed income base while retaining some flexibility and a potential inheritance.

Frequently Asked Questions About Annuities

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

A living annuity keeps your capital invested and lets you draw an income between 2.5% and 17.5% of your remaining capital per year; the money can be left to your beneficiaries. A life annuity pays you a guaranteed income for life in exchange for your capital, which the insurer keeps. The key trade-off is flexibility versus guaranteed income.

Can I change my annuity after retirement?

With a living annuity, you can change your underlying investments and adjust your drawdown rate once a year. You can also move your living annuity to a different provider. However, you cannot convert a life annuity back to a living annuity once it is in force; the decision is permanent. For a broader explanation, see the plain-language guide to annuities.

What happens to a living annuity when I die?

The remaining capital in your living annuity passes to your nominated beneficiaries. They can choose to take it as a lump sum or continue receiving income from the policy. This is one of the features that makes the living annuity popular with retirees who have dependants.

Is annuity income taxed in South Africa?

Yes. Both living annuity and life annuity income is taxed as ordinary income under the SARS personal income tax tables. You benefit from the applicable rebates for your age, and if your income falls below the current tax threshold, you may owe no tax. Tax tables change annually, so always confirm current figures with SARS or a tax adviser.

How much of my retirement fund must I use to buy an annuity?

Under South African law, you must use at least two-thirds of your retirement fund to purchase an annuity. The remaining one-third can be taken as a taxable cash lump sum. If your total fund value is below the current SARS de minimis threshold, you may be permitted to take the full amount as a lump sum. For a detailed explanation, see what is an annuity in detail.

What is a sustainable drawdown rate?

A sustainable drawdown rate is the percentage of your living annuity capital you can draw each year without running out of money during your lifetime. There is no single universal answer, as it depends on your investment returns, inflation, and how long you live. Many financial planners treat a rate below 5% to 6% as generally conservative in the current environment, though this is not a guarantee.

What happens if I withdraw more than 17.5% from my living annuity?

You cannot. SARS limits the maximum drawdown rate on a living annuity to 17.5% per annum. If you need more income than that, you would need to access other sources or reconsider your retirement structure.

The Key Points to Take Away

An annuity converts your retirement savings into income. At retirement, South African law requires you to use at least two-thirds of your retirement fund to purchase one. The two main options are a living annuity and a life annuity, and the choice you make will affect your income, your tax, and your estate for the rest of your life.

A living annuity gives you flexibility and preserves capital for your heirs, but you carry the investment and longevity risk yourself. A life annuity removes those risks entirely, but you give up your capital permanently. Most retirees benefit from understanding both before making a decision, and many end up with a blend of the two.

Tax applies to both types of annuity income at your marginal rate, with rebates available based on your age. Drawdown rates matter enormously in a living annuity: drawing too much too early is one of the most common and most damaging mistakes in retirement.

This article is general information, not personal financial advice. Your own circumstances, including your health, dependants, other income sources, and risk tolerance, should drive the decision. The retirement planning guide for South Africans gives you the broader context, and the annuity calculator tools can help you model what different income levels look like with your own numbers.