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At a glance
- The choice of annuity is irreversible. It is a significant financial decision that requires planning ahead and having financial conversations with clients years before retirement.
- Why advisers should frame annuity discussions around the five big annuity questions clients ask rather than products.
- Key differences between life or guaranteed, living and hybrid annuities.
- Why preserving capital in a living annuity preserves income, which typically means a drawdown of around 5% or lower.
Whether your client has a lot or a little saved, is ready for retirement or intends to never stop working, at some point many will need to make an annuity choice – guaranteed/life, living/linked or hybrid. You can help them make the right choice and enjoy financial stability in retirement by ensuring they know the differences between the options.
Start annuity conversations with clients before retirement
Choosing an annuity for retirement or income purposes involves a significant amount of money and is an irreversible decision. This makes it all the more important for clients to be aware of all the product features, risks and rewards so they can make a good financial decision.
Talking to a 20- or 30-year-old about retirement and annuities may be a bridge too far, but around 40 we all start thinking about old age and money. It’s a good time to start the conversation so your clients are well equipped to make informed decisions when they need to. Wait too long and decisions can be hurried and inappropriate.
Address clients’ annuity questions
Annuities are complex products. Based on recent FAIS Ombud experience (2024/5 Annual Report, December 2025 newsletter and a 2026 ruling) many clients don’t understand these products, despite careful explanations from advisers. In a recent case, a member wanted access to capital after annuitisation. In another, a guaranteed/life annuity was selected that left the spouse of the annuitant without any funds when the annuitant died. These are bad financial outcomes that you want your clients to avoid.
Explaining products in terms of clients’ annuity questions will help them make better financial decisions, rather than launching into technical product details without relating them to client needs.
Clients want to know:
- How much income will I get?
- When will I get paid and for how long?
- Will my income increase?
- Can I access my capital?
- What happens when I die?
In light of these questions, it is easy to explain the three types of annuities and how they work.
Guaranteed or life annuities
For clients: it’s like a pension for life. Money is handed over to a provider, they manage it and pay a “pension” until death. The amount paid is aligned with interest rates at the inception date, not market growth.
Guaranteed or life annuities offer a monthly income for the life of the member, and this income may increase in small amounts over time, either in terms of the annuity contract or at the product provider’s discretion. There is no return of capital on death, or at any other time.
However, some providers offer joint annuity options covering spouses and partners, and some offer a guarantee period such as 10 years.
Guaranteed annuities are great because they are simple, and income is guaranteed for life. But that income may be smaller than clients expect, need or are used to, and there is nothing for dependants or beneficiaries on death. If the annuitant has a dependant, the end of the annuity on their death can be financially devastating for the surviving partner or child.
Living or linked annuities
The basics: clients need to think of these as investments that can generate income but also go up and down in value. There are no guarantees of income or capital.
Living annuities offer flexibility with a choice of where to invest (subject to regulation) and how much income to receive (between 2.5% and 17.5% of capital) decided annually on the policy anniversary. On death of the annuitant, any remaining capital is available for distribution to either beneficiaries or the estate. Capital can earn market-related returns, but can also run out before the annuitant passes, leaving them with no income or capital late in life.
Fees will impact values, and the choice of where to invest can become complicated.
Living annuities may offer higher income options than guaranteed annuities for the same capital amount, but they have to be actively managed to ensure capital and income last for life. Annuities that use model portfolios, such as the 1Life Living Annuity, make investment decisions easier and offer low fees.
Hybrid annuities
These annuities combine features of living and guaranteed annuities. A portion of capital is allocated to the guaranteed-for-life income and a portion to an investment that is managed as a living annuity. With providers also offering the ability to transfer funds between the two allocations, they can become complicated to manage over time.
What influences your clients’ choice?
Client needs must rule the discussion and decision on which annuity to take, including consideration of the following:
- Does your client have dependants who need an income when they pass? This would suggest a guaranteed annuity is not the best option.
- Does your client have other discretionary investments and/or pension funds? These could be used alongside a guaranteed annuity for extra funds and as a legacy.
- Is your client’s goal to maximise income for their life or do they want to leave a legacy? If leaving a legacy is paramount, a living annuity should be the better option.
- What is your client’s tax position and how is the choice of annuity going to impact this – before and after death? Living annuities may be more tax efficient, but each client’s tax position before, at and after retirement, as well as on death, must be taken into account.
- How will your client manage funds later in life – would they or an appointed representative be comfortable making decisions around living annuity investment options and income?
These questions illustrate how complex retirement decisions can be and how big the need is for sound financial advice when making the decision of which annuity to buy.
In an age of choice and flexibility, living annuities seem the best option for many and offer a higher income. But there is only one reliable way to preserve that higher income: preserve capital. The way to preserve capital is to select a lower drawdown percentage of around 5%. Take higher drawdowns and income is likely to fall as capital is eroded, potentially to zero. Clients need to fully understand that living annuities come with no guarantees and selecting a high drawdown rate initially could mean no money later in life.
Drawdown dangers in numbers
As at December 2024, Asisa reported that there were 554 043 living annuities with over R781 billion in management. The average drawdown rate is 5.57%. That is a capital-sustaining level, within the commonly suggested 4%–5% range. But, over 214 000 annuities have a 10% or higher drawdown.
Our colleagues at Wealthport ran the analysis to show the effects of high drawdowns, assuming a client retires at age 65 and funds in a living annuity earn a 5% annual return before tax and costs. We have used a lower return than the JSE has recently delivered as returns will be affected by tax and costs, and the higher returns of recent years may not continue.
R5 million, 5% drawdown = R20 000 a month
Selecting a 5% drawdown means a client can enjoy the same pension for at least 25 years of retirement. With the return matching the growth, the client preserves capital (R4.7m at age 90) making the drawdown sustainable. As many do, clients can also easily increase the drawdown in later years when life expectancy is lower. Contrast this with a 10% drawdown:
R5 million, 10% drawdown = R41 000 a month at age 65, R28 000 at 75 and R13 000 at age 85
It’s even worse with only R10k monthly income at age 90. The higher drawdown rate erodes capital quickly, leaving far less in later years. Even if your client is not overly concerned at using the capital saved for retirement, they will have a lot less to live on because drawdown percentages are revised annually on the policy anniversary based on the market value at that date.
The numbers are similar for an annuity of R10 million, with a 5% drawdown preserving a monthly income of around R41 000 to age 90+. Although a 10% drawdown gives a higher income at age 65 of R83 000, this falls to R47 000 at age 75, R26 000 at age 85 and R20 000 at age 90.
Tell a client they may erode their capital and the concept and implications can be hard to fully understand. Show them the difference in income in later years, and life expectancy of a 65 year old, and the implications of higher drawdowns are easier to relate to – and hopefully avoid.
Saving more will mean more income as well
Chatting to clients before retirement and explaining the annuity options also gives them a chance to increase their savings before retirement, which means more money and more options. Tax breaks have increased too, giving an added incentive to add to the retirement pot. Of course, not all clients will be receptive to retirement conversations, but the more they know, the better the decisions they can make for them and their families.
Retirement is an opportunity for ongoing financial advice
Retirement is not a once-off opportunity for financial advice. It is an ongoing process that requires expert financial planning knowledge for many years. It is a space where financial advisers can add immense value by explaining the basics and subtleties of retirement and annuity options.