Living vs Guaranteed Annuity: Which Risks Do You Keep?

This question concerns retirement money already available to provide income. The decision about taking a retirement lump sum comes before it. Discretionary savings, compulsory retirement money and an existing pension need separate treatment; they are not interchangeable merely because all can contribute to retirement spending.

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Start with the promise, not the product label

The word “annuity” covers arrangements with substantially different obligations. In a living annuity, an investment statement may show a large capital balance while the income it can support is uncertain. In a life annuity, the insurer may owe continuing payments even after the total paid exceeds the original purchase price, but the original capital generally cannot be reclaimed on demand.

The ASISA Standard on Living Annuities requires member disclosures about investment and longevity risks, conversion and asset composition. These are useful questions to bring to a comparison, rather than treating flexibility as an unqualified advantage.

Insurer guarantees are obligations under the policy. They do not mean that every expense will remain affordable, that tax cannot change or that the insurer has no credit risk. Likewise, a living annuity's remaining balance is not a promise that a particular inheritance will survive the withdrawals.

A withdrawal percentage is not an investment return

For a new living annuity, the usual annual income limits are 2.5% to 17.5% of the relevant investment value. The Allan Gray policy document effective 26 August 2026 records those limits and anniversary changes. Older policies can have legacy provisions, so the actual policy matters. The legal maximum is not a sustainable-income recommendation.

Consider an invented R6 million living annuity paying R300,000 gross for the year, initially 5%. To make the timing transparent, assume the entire payment is taken at the start and the remaining R5.7 million then experiences a 15% loss, after all investment and administration costs. The closing value is R4,845,000. Paying the same R300,000 next year would require about 6.19% of that smaller balance. Increasing the payment by an assumed 5% to R315,000 would require about 6.50%.

This is a one-year adverse illustration, not a return forecast or a monthly-payment simulation. It shows why an unchanged rand income can become harder to support. A permitted withdrawal does not prove that the underlying investment earned it. Part can come from consuming capital.

The same distinction applies when someone divides a life annuity's annual payment by its purchase price and calls the result a “yield”. That ratio is a payout rate. It reflects the exchange of capital for contractual payments and the pooling of longevity risk; it is not directly comparable with the return on a portfolio whose capital remains available. Comparing the two percentages without the remaining rights can make an apparently generous payment misleading.

The sustainable-withdrawal question explores how an invested income can be tested over time. A single favourable year is insufficient evidence for a permanent spending level.

“Guaranteed” needs a second question: guaranteed to do what?

A level payment, a fixed annual increase, an increase linked to CPI and a with-profit increase are different promises. A current insurer product guide from Just SA demonstrates these distinctions. With-profit increases can depend on investment experience; targeting inflation is not the same as contracting to match it. The citation establishes the available types, not a recommendation of that insurer.

An illustration can isolate inflation without pretending to quote a product. Begin with an income index of 100 and assume household costs rise by 5% every year. After ten annual increases, costs are 162.89. An unchanged income of 100 buys 61.39% of what it bought initially. Income increasing at 3% reaches 134.39 and retains 82.50% of initial purchasing power. Income increasing at 5% keeps pace with that particular assumed cost path.

Those examples start from the same index to show the mechanism. Actual annuities with different increase terms will generally have different starting quotations for the same premium; the table below is not a comparison of purchasable offers.

CPI linkage also needs interpretation. It follows a specified index and contractual timing, rather than the exact spending basket of one household. Medical costs, support for relatives and changes in care needs can follow a different path. The relevant question is how much of those differences the household can fund elsewhere.

Compare the survivor's budget before comparing death benefits

A spouse's expenses seldom become an exact fraction of the couple's previous expenses. Housing, security and many household services continue; some personal expenses stop and care costs may change. A policy's survivor percentage needs to be tested against that future budget.

Suppose, purely to show the relationship, a payment of R360,000 a year falls to 75%, or R270,000, after the first death. If the survivor's comparable funding requirement is 80% of the original amount, it is R288,000: an R18,000 annual gap before any change in tax. The fact that the policy continues paying for life does not remove that gap.

This is a gross-income illustration, not a net household budget. The survivor may have different income and rebates, so a real comparison must recalculate tax rather than multiplying the couple's after-tax income by 75%.

A minimum payment period is another distinct feature. Depending on the contract, payments or a calculated benefit may continue after an early death for the remaining period. It is not automatically a return of the full purchase price. Conversely, saying that every life annuity leaves “nothing to beneficiaries” ignores optional protections. Obtain the actual terms for death during and after that period, and for either spouse dying first.

Flexibility has practical limits

A living annuity can allow investment changes and future income elections, but it is not an emergency savings account. The August 2026 policy cited above restricts cancellation, loans and cession. A separate cash requirement therefore needs a separate funding source; choosing a living annuity does not by itself solve access to a lump sum.

It may be possible to transfer a living annuity or convert it into a conventional life annuity, subject to the relevant process. ASISA describes conversion as typically irreversible. Leaving that option open has value, but the future capital balance and future quotation are both unknown. “I can guarantee the income later” is an option to investigate, not assurance that the same income will still be affordable later.

Administration also matters as people age. An arrangement requiring annual investment and withdrawal decisions creates work for someone. Establish who can assist if the annuitant loses capacity, how the insurer or administrator recognises that authority and whether the spouse understands the arrangements. Informal account access is not a substitute for valid authority.

Use the same specification for every quotation

The following record can expose why two offers differ before a payment is selected. It is useful even when the final decision is to retain a living annuity.

Pension income must be considered with other taxable income. SARS explains why income from more than one source can create a shortfall in tax withheld. A monthly deposit after PAYE is not necessarily the household's final after-tax entitlement. A living annuity's internal tax treatment and taxation of payments are also separate matters.

The objective is not to accumulate the most quotations. It is to understand which differences are prices for useful protections and which are simply mismatched assumptions. If the income falls short under comparable terms, changing the product label cannot substitute for revisiting spending, retirement timing or other resources.

When neither product alone fits the whole job

Some households have an essential spending gap that they want contractually covered and other capital intended for adjustable spending or beneficiaries. That can lead to a combination, but no default split follows from the product comparison. The combined-annuity article works through the income-floor and residual-capital problem, including a survivor test.

ClearGauge's judgement is that this decision is strongest when the household can name both the risk being transferred and the flexibility being surrendered. An inheritance objective cannot be assessed separately from the income required to keep the retiree financially independent. Nor does a wish for certainty establish which guarantee terms are sufficient.

If the unresolved question is how the quotations, spouse's needs and other assets fit together, a Financial Clarity Review can examine those connections. This article has not assessed your finances, health, tax position or capacity for loss, and does not select an annuity or transaction for you.

Sources checked 6 September 2026. Product terms can change; the current individual quotation and policy govern. All numerical examples are ClearGauge educational calculations with stated assumptions, not insurer quotations, benefit forecasts or recommendations.