Annuity’ is another word for the monthly pension you buy from an insurance company.

Money that is readily available is a temptation even to the most disciplined of us. If you buy an annuity, you can be sure that your money is kept safe for you. You also enjoy the returns of having your money invested in the market and you have the continuous support of a financial adviser.

There are many annuity options available and you will have different needs that might be catered for by taking out more than one annuity option. Speak to your financial adviser who will help you make the best choice suited to your needs.

Choose the right annuity for you


The annuities in detail

Now that you have a better idea of which annuity might be best for you when you retire, have a look through the list below, find the annuity you chose and read about it in more detail:

Single-life annuity

  • You will receive a pension until you die.
  • You have the option of a built-in guarantee of up to 15 years. If you die before then, the pension will be paid to your nominated beneficiaries*.
  • The longer the guarantee on your pension, the lower the annuity payment.
  • You have the option of adding an escalation** so that your pension amount increases every year.

Joint-life annuity

  • You will receive a pension until you die, after which the pension will be paid to your spouse until he/she dies.
  • You have the option of a built-in guarantee of up to 15 years. If both you and your spouse pass on before the guarantee period is up, the pension will be paid to your nominated beneficiaries*.
  • You have the option of adding an escalation** so that your pension amount increases every year.

Living annuity

  • This annuity option is structured for someone with a large amount of retirement savings who is able to tolerate risk in the market environment.
  • An anniversary date is allocated to you. Once a year you choose the frequency of your pension (monthly, quarterly, bi-annually or annually) and you choose your income level which must be between 2.5% and 17.5% of your capital investment.
  • The capital is re-invested in an investment portfolio to earn returns.
  • You are able to choose from a number of investment options like money-market portfolios, unit trusts and guaranteed funds.
    On death the annuity is transferred into your beneficiaries’ names* and a pension is paid to them.
  • You are paid a pension until the money runs out.

Secured-living annuity

  • This is a combination of any of the conventional annuities and a living annuity.
  • The risk involved in this annuity will be determined by the allocation amounts between the conventional and the living annuity, the underlying portfolios of the living annuity and the income level in the living annuity.

Back-to-back annuity

  • This is a combination of an annuity and a life assurance policy.
  • The life policy is charged at standard rates, no matter the health status of the annuitant at the time.
  • The premium for the life policy is taken off from the monthly pension.
  • This annuity will pay out for the annuitant’s entire life time.
  • On the death of the annuitant the insurance company pays a lump sum out to the nominated beneficiaries*.
  • Two sets of fees are payable – on the annuity and also on the insurance policy.
  • The monthly income will be lower than on a single-life or joint-life annuity.

With-profit annuity

  • This is an alternative to choosing a set escalation** when buying your annuity.
  • It is available as either a single-life or joint-life annuity.
  • Your pension increases every year depending on the bonus declared by the insurer from whom the annuity is purchased.
  • This bonus depends on the insurer’s investment performance.
  • Pensions can never go down once a bonus has been paid on your pension.

Fixed-income annuity

  • This will pay a guaranteed income throughout your lifetime.
  • This is the cheapest annuity because there are no increases.
  • This annuity will not keep up with inflation and the purchasing power of the annuity will decrease.

Inflation-linked annuity

  • This annuity is similar to a fixed-income annuity, except there are periodic increases to the pension, which are linked to inflation.
  • It is more expensive than a fixed-income annuity and you will find that the same capital amount will buy a lower pension.
  • It is generally agreed that this is a better option than the fixed-income annuity because it keeps up with inflation.

The Alexander Forbes Lifestage Annuity™

Alexander Forbes has developed the Lifestage Annuity™ framework for members who may not be able to afford an inflation-linked annuity. This framework basically delays’ buying a fixed annuity until it becomes more affordable. The Alexander Forbes Lifestage Annuity™ combines the strengths of the two MAIN types of annuities:

  • A living annuity
    • Your money is invested in a selection of portfolios, aimed at growing your asset base effectively. You choose where to invest your money
    • You have the flexibility (within a specified range) to draw the income you need
      Any money left on your death may be left to your beneficiaries
    • It is difficult to decide how much to draw each month to last your lifetime
    • You are exposed to the risk of living long and running out of retirement money
  • A life annuity
    • Protects against living longer than expected because the company providing the pension will give you an income for as long as you live
    • There are different types of life annuities -some give you full protection against inflation, while with others the payment increases at a fixed percentage selected at the time that you buy the annuity. All life annuities have one characteristic in common: the company providing the pension will do so for as long as you live
    • The payments you receive may not increase at the same rate as the cost of living, except if an inflation-linked annuity is bought
    • Unfortunately an annuity linked to inflation is often not affordable at retirement. For this reason we recommend delayed annuitisation (see below)
    • It does not allow you to leave an inheritance for your children
  • Delaying the purchase of your life annuity gives you the power to make the most of your investment choices.
    • It is not always the perfect solution to buy a life pension on the day you retire
    • The reasons behind the delay include:
      •  Your money will probably grow through longer exposure to investment markets (this will, of course, depend on your age, withdrawal rate and market performance)
      •  The return or ‘implied yield’ you get when buying a life annuity increases as you grow older
      • You have more flexibility in the years just after retirement because you can determine your level of income. Also, you will be able to leave the remainder of your savings to nominated beneficiaries on your death.

*No Capital Gains Tax or Estate Duty is payable on the transfer of a living annuity or back-to-back annuity to the beneficiary on the death of the annuitant.

Inflation is a measure of the constant increase in prices over time. Inflation is best described as how you can buy more with R1 today than you will be able to in the future.

**A note on escalations

Escalations are pre-determined annual increases in your monthly pension. They aim to try and make your income’s purchasing power keep up with inflation.

Escalations are available on single-life or joint-life annuities and range between 0% – 20% depending on insurer.

Other sources of income

You might find that you won’t be able to save the amount of money you will need to retire comfortably. One option is to look for other sources of income:

  • Interest from investments
    • Interest-bearing investments are generally investments where money is lent and borrowed for less than 12 months and, in turn, you receive an income from the interest. Interest- bearing investments include:

      • Bank accounts
      • Unit trust funds
      • Negotiable Certificates of Deposit
      • Treasury Bills (short-term loans made by the government)
      • Bank term deposits.
    • At the end of the contract period you will get your capital back.
  • Part-time work

    Retirement means you are leaving the work environment. It does not mean that you are retiring from life. You now have more time to spend on doing the things that you really want to do. However, many retirees find themselves missing the work environment and choose to work part-time to keep themselves busy. More importantly, you can make extra money to supplement your income.

  • Rental Income

    By the time you retire, you might not have to worry about your children as they will probably have moved out of home. It will probably be just you and your spouse at home and you might not need all the space you have available in your house. For most people, it is better to buy a smaller house. You could also rent out a few rooms in your house to receive an income.

  • Dividends

    A dividend is the interest you earn from shares that you own. Owning shares in a company means that you are a part-owner of a company that is listed on the JSE. With effect 1 April 20102 dividends from local companies and listed non-resident companies are subject to a dividend withholding tax of 15%. Investing in companies that pay large dividends can provide additional income.

The effects of signing an indemnity form when you buy an annuity

If, when you retire, you purchase an annuity with your retirement fund benefit, you need to give your administrator or financial adviser an instruction and indemnity to assist you to buy an annuity in your own name. You should be aware that signing this instruction and indemnity has the following implications:

  • You consent to the administrator making any deductions from your benefit that are:
    • Permitted by Section 37D of the Pension Funds Act for:
      • A housing loan
      • Medical aid subscriptions paid by the fund
      • A divorce order
      • A maintenance order
      • Outstanding tax due to SARS
      • An admission of your liability or a court ruling against you for a loss suffered by your employer, for an event such as theft, dishonesty, fraud or misconduct.
    • Set out in the rules of your retirement fund.
  • You acknowledge that your investment instruction means that:
    • You take full responsibility for your own pension.
    • You fully understand the consequences of your instruction and that you remain accountable for the accuracy of the information you provide.
  • Once your benefit has been used to purchase your annuity:
    • You have no further claims against the fund.
    • Your membership of the fund will end with immediate effect.
    • You acknowledge that you will not be a pensioner of the fund and therefore that you or your spouse, dependants or beneficiaries have no right to any benefits granted to pensioners of the fund.
  • You absolve the administrator of your benefit from any loss, damages or costs that you or your spouse, dependants or beneficiaries may incur as a result of your investment instruction.

Make sure you understand all the terms and conditions of the instruction and indemnity form. If you are not sure about anything contained in the document, speak to your financial adviser because once you have signed the instruction and indemnity form, you are liable for the outcome of your decision.