Once you make this choice, you generally cannot undo it. Here is what you need to understand before you decide.

The day you retire is not the end of your financial planning journey. In many ways, it is the beginning of its most consequential chapter.

When you reach retirement and begin drawing from your accumulated retirement savings, you face a decision that will affect your income, your financial security, and your estate for the rest of your life — and potentially beyond. That decision is whether to purchase a life annuity, a living annuity, or a combination of both.

Most people make this decision without fully understanding what they are choosing. This article is intended to change that.

The Life Annuity — Certainty at a Cost

A life annuity is purchased from a life assurance company. In exchange for a lump sum — your accumulated retirement capital — the insurer pays you a guaranteed income for the rest of your life.

You cannot outlive a life annuity. Whether you live to 75 or 105, the payments continue. The insurer carries all the investment risk and all the longevity risk. You simply receive your income.

The advantages:

• Guaranteed income for life — complete certainty
• No investment decisions required after purchase
• Protection against living longer than your savings

The disadvantages:

• Once purchased, the capital is gone — it belongs to the insurer, not your estate
• Your income may not keep pace with inflation, depending on the type you choose
• If you die shortly after purchase, your heirs receive little or nothing (unless you selected a guaranteed period or joint life option)
• No flexibility to adjust income based on changing needs

A life annuity is essentially an insurance product. You are insuring against the risk of outliving your money. Like all insurance, it costs something — in this case, you give up capital and flexibility in exchange for certainty.

The Living Annuity — Flexibility with Responsibility

A living annuity works differently. Your retirement capital remains invested in your name, in an investment portfolio that you select. You draw an income from that portfolio — between 2.5% and 17.5% of the portfolio value annually, reviewed each year on your policy anniversary.

You remain the owner of the capital. When you die, whatever remains in the living annuity passes to your nominated beneficiaries — either as a lump sum or as a continued annuity.

The advantages:

• Capital remains yours and passes to your estate
• Investment flexibility — you choose where your money is invested
• Drawdown flexibility — you can adjust your income within the prescribed limits each year
• If markets perform well, your capital can grow even while you draw income

The disadvantages:

• You carry the investment risk — poor markets reduce your capital
• You carry the longevity risk — if you draw too much or markets underperform, you can run out of money
• Requires ongoing management and annual review
• Discipline in drawdown rate is critical — many people draw too much too early

The Central Risk of a Living Annuity — Sequence of Returns

The single greatest risk in a living annuity is not a bad market — it is a bad market at the wrong time. This is called sequence of returns risk.

If markets fall sharply in the first few years of your retirement while you are drawing income, the combination of falling values and regular withdrawals can permanently impair your capital — even if markets subsequently recover strongly. A portfolio that loses 30% in year one while you are drawing 7% annual income is dramatically harder to recover than a portfolio that experiences the same returns in a different order.

This is why drawdown rate management and investment strategy in a living annuity are not set-and-forget decisions. They require annual review and adjustment as your age, health, and market conditions change.

Which One is Right for You?

There is no universal answer. The right choice depends on a combination of factors that are specific to your situation.

Favours Life Annuity: Minimal other income sources, Good health (short life expectancy), Low estate planning priority, Low risk tolerance, Smaller capital, Low need for flexibility

Favours Living Annuity: Pension/rental/business income, Poor health (shorter life expectancy), High estate planning priority, Higher risk tolerance, Larger capital, High need for flexibility

For many retirees, the optimal solution is a combination — using a life annuity to cover essential living expenses with certainty, and a living annuity for discretionary income, flexibility, and estate planning. This hybrid approach captures the benefits of both while mitigating the primary risks of each.

Why This Decision Requires Expert Guidance

Or visit the Book a Discovery Call page for more options.

Want to work through this for your specific situation? Let's have a conversation.

Shaun Dalton CFP® | Postgraduate Diploma in Investment Planning | LLB
Efficient Wealth — Authorised FSP 655 | Potchefstroom