What Is an Annuity?

An annuity converts your retirement savings into regular income. In South Africa, most people encounter one at retirement, when the law requires you to use at least two-thirds of your retirement fund to purchase some form of income-generating annuity. The remaining third can be taken as cash, up to the current tax-free threshold.

I write about this decision often because it shapes your retirement income, your tax, and what you leave behind. The choice you make is largely irreversible, so understanding your options matters before you commit.

There are two main types available in South Africa: a life annuity, which pays you a guaranteed income for life in exchange for your capital, and a living annuity, where you stay invested and draw an income you choose within legal limits. The difference between them is fundamental, and I want to walk you through both in plain language.

If you are saving towards retirement outside an employer fund and are confused about retirement annuities (the pre-retirement product) versus post-retirement annuities (the income products), see how retirement annuities work in South Africa.

How an Annuity Works

You purchase an annuity with a lump sum of capital. In return, you receive regular income, either for life or for as long as your invested capital lasts. The mechanics differ depending on which type you choose, but the core exchange stays the same: you hand over a sum, and you receive payments.

In South Africa, the two-thirds annuitisation rule is a legal requirement. When you retire from a pension fund, provident fund, or retirement annuity, you cannot simply take all your money as cash. At least two-thirds must be used to purchase an approved annuity. Only the first third can be taken as a lump sum, and even that is taxed using the retirement lump sum tax table after the tax-free portion.

Let me show you how this works with a concrete example. Suppose you retire with R3 million in a retirement annuity. You may take up to R1 million as a lump sum (tax applies above the current tax-free threshold). The remaining R2 million must go into a life or living annuity to generate your monthly retirement income.

If that R2 million sits in a living annuity with a 5% annual drawdown rate, you would receive roughly R100,000 per year, or about R8,333 per month, before tax. These are illustrative figures only. For a more detailed worked example, see what monthly income you can expect from a lump sum at retirement.

The Two Main Types of Annuity in South Africa

South Africa has two primary post-retirement income annuities. Each suits a different type of retiree, and understanding the difference is the most important financial decision you will make at retirement.

Life Annuity

A life annuity is a contract with a registered insurer. You hand over your capital, and the insurer guarantees you a fixed monthly income for the rest of your life, regardless of how long you live. Some life annuities include escalation (your income increases each year), a spouse’s benefit (your partner receives income after your death), or a guaranteed payment period (income continues to a beneficiary if you die early). Once you purchase a life annuity, you cannot access the underlying capital again.

The income you receive is calculated using guaranteed annuity rates. These rates depend on your age, gender, the options you select, and prevailing interest rates at the time of purchase. If you want to understand how insurers calculate these figures, see how guaranteed annuity rates are calculated.

Living Annuity

A living annuity is fundamentally different. You remain the owner of the underlying investment. You choose how the capital is invested, typically across a range of unit trust portfolios, and you draw a percentage of the portfolio value as income each year.

The drawdown rate is the percentage of your capital you take as income annually. By law, it must fall between 2.5% and 17.5% per year. You select it annually on your policy anniversary and can adjust it as your circumstances change.

The critical risk with a living annuity is capital depletion. If your drawdown rate is too high relative to investment returns, your capital shrinks each year and your income falls in rand terms over time. Drawing above roughly 6 to 7% per year is widely considered unsustainable over a long retirement, particularly after accounting for inflation and fees.

If you are considering retiring outside South Africa, the choice between a life annuity and a living annuity has additional tax and remittance implications. Living annuity versus life annuity for South Africans retiring abroad covers those differences in detail.

Life Annuity vs Living Annuity: Side by Side

The core question most retirees face is which annuity type suits their situation. Here is how they compare across the features that matter most.

The practical interpretation: if outliving your money is your biggest fear, a life annuity removes that risk entirely, but you give up all flexibility and your capital. If you have enough capital that a conservative drawdown can sustain your lifestyle, and you want to retain the ability to leave assets to your family, a living annuity may serve you better.

Most people do not have to choose only one. A blended approach, using part of your capital to buy a life annuity for guaranteed income and the remainder in a living annuity for flexibility, is a legitimate and often sensible strategy.

For those planning to emigrate, read which annuity type suits South Africans planning to live abroad before deciding.

How Annuity Income Is Taxed in South Africa

All annuity income you receive in retirement is taxed as ordinary income. There is no special rate or exemption for annuity payments. SARS treats your monthly income from a life annuity or a living annuity the same way it treats a salary.

Your annuity provider is required to deduct PAYE tax on each payment based on the income tax tables for that tax year. You must still submit an annual tax return, because your final tax liability is calculated across all sources of income you earn during the year.

The lump sum you take at retirement (the first third) is taxed separately using the retirement lump sum tax table. There is a lifetime tax-free threshold on retirement lump sums, but this threshold is adjusted in the annual Budget. Always confirm the current figure with SARS or a financial adviser before making decisions.

Here is a point many retirees miss: if you have unused tax-free lump sum allowance and also receive other income sources, your effective tax rate in retirement could be lower than during your working years. This makes annuity income planning a genuine tax planning opportunity.

The two-pot retirement system, introduced in 2024, also affects how your retirement savings are structured before you annuitise. How the two-pot retirement system affects your retirement tax planning explains the interaction in detail.

Who Should Consider an Annuity?

Almost every South African who retires from a formal retirement fund will need to purchase an annuity of some kind. The two-thirds annuitisation rule removes the choice of taking all proceeds as cash. The real decision is which type suits you.

Members of the Government Employees Pension Fund (the retirement fund for South African public servants) receive a defined benefit pension on retirement. That pension functions in the same way as a life annuity, providing a guaranteed income for life. GEPF members are largely insulated from the life-versus-living annuity decision unless they have additional savings in a retirement annuity or preservation fund.

For everyone else, the decision depends on several factors.

Your capital base matters. A retiree with R500,000 in a living annuity drawing at 5% receives only R2,083 per month before tax. That is below the tax threshold but also below a comfortable income for most people. A life annuity on the same capital will often produce a higher monthly rand amount, particularly for older retirees, because the insurer factors in your remaining life expectancy.

Your health, your appetite for investment risk, whether you have dependants, and your other income sources all feed into the decision. Early retirees face a longer retirement period, which affects both choices differently. Managing retirement funds when you retire early addresses the planning considerations for those retiring between 51 and 61.

The Risks and Trade-offs You Need to Understand

No annuity is risk-free. The risks simply differ depending on which type you choose.

With a life annuity, the primary risks are longevity of the insurer and the opportunity cost of handing over your capital permanently. If you die early, the insurer retains your capital unless you purchased guarantees, which reduce your starting income. Inflation is another concern: unless your life annuity includes automatic escalation, the purchasing power of a fixed monthly income erodes over time.

With a living annuity, the dominant risk is drawing your capital down faster than your investments can replenish it. Drawing above roughly 6 to 7% per year is widely considered unsustainable over a long retirement, particularly after fees and in periods of poor market performance. A sequence-of-returns risk (where poor investment returns occur in the early years of your retirement) can permanently impair your capital base even if markets recover later.

Fees matter enormously in a living annuity. Total investment charges of 2% or more per year, compounded over 20 to 30 years, have a material impact on how long your capital lasts. Keeping your total annual costs reasonable is one of the most effective ways to extend the life of a living annuity portfolio.

Concentration risk is also a genuine danger. Holding the bulk of your retirement income in a single asset class or a single product leaves you exposed to a single point of failure. Why risk concentration is a danger in retirement portfolios explains why diversification matters even after you stop contributing.

Other Annuity Products Worth Knowing About

Beyond the two main post-retirement products, there are other annuity-related structures a South African retiree or pre-retiree should know about.

A retirement annuity (often called an RA) is not a post-retirement income product. It is a pre-retirement savings vehicle, governed by Regulation 28 of the Pension Funds Act. Regulation 28 limits how much of your retirement savings can be held in any single asset class, specifically to prevent over-concentration in equities, property, or foreign assets. An RA helps you save towards retirement in a tax-efficient way, with contributions deductible up to prescribed limits. At retirement, the RA balance is then used to purchase a life or living annuity. Understanding how retirement annuities work in South Africa is essential before and after retirement.

A guaranteed annuity is sometimes used as a synonym for a life annuity, but the term also applies to specific rates that insurers offer at the time of purchase. Rates change with interest rate conditions.

For those interested in giving back, a charitable gift annuity is a less common but real structure where you donate capital to a qualifying organisation in exchange for a fixed income for life. How a charitable gift annuity works explains the mechanics and considerations.

Frequently Asked Questions About Annuities

Can I get my money back from an annuity?

With a life annuity, no. Once you hand your capital to the insurer, you cannot reclaim it. With a living annuity, you do not receive the capital as cash, but you retain ownership of the underlying investment and can adjust your drawdown or switch your investment portfolios at any time.

What happens to my annuity when I die?

A life annuity ends at death unless you purchased a guarantee period or a spouse’s benefit, in which case income continues for the specified term or to your surviving spouse. A living annuity passes to your nominated beneficiaries, who can take the remaining capital as a lump sum or continue it as an annuity in their own names.

Is a living annuity better than a life annuity?

Neither is universally better. A living annuity offers flexibility, inheritance potential, and investment upside, but carries the risk of capital depletion. A life annuity provides certainty of income for life but forfeits your capital. Your health, capital base, risk tolerance, and income needs determine which is more suitable for you.

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

Yes. South African legislation allows you to convert a living annuity into a life annuity at any point, provided you meet the insurer’s minimum capital requirements. The switch is one-directional: once you move to a life annuity, you cannot return to a living annuity with that capital.

Are Shari’ah compliant annuities available in South Africa?

Yes. Several South African insurers and investment managers offer Shari’ah compliant living annuity portfolios, structured to avoid interest-bearing instruments and industries that conflict with Islamic finance principles. Shari’ah compliant life annuities are less widely available but do exist. Speak to a CFP professional who understands both the product landscape and Shari’ah requirements to find a suitable option.

How long should my annuity last?

That depends on your drawdown rate, investment returns, fees, and your longevity. A living annuity drawing at 5% per year might comfortably last 25 to 30 years in a diversified portfolio with reasonable costs. A life annuity, by definition, lasts for your entire life.

What is a Regulation 28?

Regulation 28 of the Pension Funds Act limits how much of your retirement savings can be held in each asset class. It applies to retirement annuities and other employer-based retirement funds. The rule exists to prevent excessive concentration in equities or foreign assets and to protect members from over-concentration risk.

The Bottom Line on Annuities

An annuity is the mechanism through which your retirement savings become retirement income. Understanding what an annuity is, and how the two main types differ, is arguably the single most consequential financial decision you face at retirement.

The life annuity gives you certainty at the cost of flexibility and your capital. The living annuity gives you control and inheritance potential at the cost of investment and longevity risk. Most retirees benefit from thinking about a blend of the two rather than treating it as a binary choice.

Tax, the two-thirds annuitisation rule, Regulation 28, and the two-pot system all intersect with your annuity decision in ways that are specific to South Africa and to your personal circumstances.

This article is general information only. It is not personal financial advice, and it does not take your individual situation into account. Before making any annuity decision, consult a qualified CFP professional. Professional retirement planning financial advice is the right next step if you are approaching retirement and want guidance tailored to your circumstances.