Living Annuity Compared to Guaranteed Annuity Explained

What are the differences between living and guaranteed annuities?

  • A living annuity is an insurance policy
  • A guaranteed annuity is an investment product
  • Guaranteed annuities offer life-long monthly incomes
  • Different guaranteed annuities suit different individual needs
  • Living annuities are flexible
  • All capital in living annuities “dies” with the investor
  • Both guaranteed and living annuities are taxable

The difference between a living annuity and a guaranteed annuity is that the first is an insurance policy and the other an investment product.

Each of these annuities meets different criteria and their selection is dependent on the requirements of the investor.

Living Annuity vs Guaranteed AnnuitiesIn this article, we describe the circumstances of a 64-year-old single mother, one year from retirement, with an 18-year-old son about to enter university.

Guaranteed annuities – an investment product

As it name suggests, guaranteed annuities secure individuals a life-long pre-determined income.

However, there are different types of annuities with a guarantee.

  • Some keep pace with rising inflation.
  • Others pay a stipulated income.
  • Some offer increases in monthly income but are subject to market performance.

An inflation-linked guaranteed annuity

While the benefit of this type of annuity is that it keeps pace with inflation, the major drawback is that all funds left in the investment at the time of death “dies” with the investor.

In other words, heirs cannot inherit from an inflation-linked guaranteed annuity.

A guaranteed period annuity

This product guarantees a monthly income for a stipulated number of years.

The drawback of this type of annuity is that it pays a lower income than an annuity without a pre-stipulated guaranteed period.

  • Once the product is purchased, the investor is “locked” in.
  • The investor cannot dictate the income amount.
  • There is no flexibility to increase the monthly income.
  • The annuity cannot be moved to another service provider.

Living annuities – an insurance product

Living annuities give policyholders the flexibility to select where their money is invested and to choose their annual income, subject to regulations.

All remaining capital can be bequeathed to heirs when the policyholder dies.

However, as with the other annuity products, there are drawbacks.

  • Capital can be completely eroded before the death of the policyholder.
  • Policyholders run the risk of poor returns on their investment.
  • Bad market performance could result in the annuity failing to keep pace with inflation.

Examples of estimated income – guaranteed annuity

Our 64-year-old single mother has R2 million in a provident fund and R400 000 to invest in a retirement annuity.

An Inflation-linked guaranteed annuity (with a guaranteed period of time) would provide a monthly income in the region of R12 300.

A guaranteed annuity (without a guaranteed payment period) would pay a lower monthly income.

Examples of estimated income – living annuity

There are three crucial factors to take into consideration:

  1. Where the company invests the capital amount
  2. Total fees payable for the policy
  3. Setting an income-level

High equity portfolio annuities could maintain a monthly inflation-linked income in the region of R12 200 for 25 years.

After that period of time, the annuity would not keep abreast of inflation.

Income, however, is not guaranteed and poor market performance could result in a monthly income of about R9 800 for 25 years.

Tax payments

Tax on retirement annuities ranges from 0% up to R500 000 and 36% on more than R1 050 001.

Monthly incomes from both guaranteed and living annuities are also taxable, depending on individual tax brackets.

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All info was correct at time of publishing