How a living annuity differs from a guaranteed annuity

A living annuity keeps retirement capital invested and pays an income selected within the permitted drawdown range. Investment performance and withdrawals change the remaining balance. The policyholder bears the risk that capital and income may not last or keep pace with living costs. A life annuity instead uses insurer pricing and guarantees defined payments for life, subject to product terms.

This calculator models the living-annuity path only. It does not pool longevity risk, price a guarantee or forecast a death date. Comparing its first payment directly with a guaranteed-annuity quote ignores fundamentally different risks, estate outcomes and flexibility.

South African drawdown limits

Living-annuity policyholders generally select annual income between 2.5% and 17.5% of the asset value. The percentage can normally be reviewed once a year at the policy anniversary. The calculator enforces that range and assumes the same percentage is selected at every future anniversary.

A legal maximum is not a sustainability recommendation. ASISA’s living-annuity material emphasises that income, investment performance and lifespan jointly determine how long capital can support payments. A high draw can rapidly erode the base and make future rand income fall even before inflation is considered.

Anniversary recalculation in the model

At the beginning of each projection year, the script multiplies the current model balance by the selected drawdown percentage. It divides that annual amount into twelve equal month-end payments. The balance earns the entered equivalent monthly return before each payment. At the next anniversary, income is recalculated from the new balance.

This means income is not automatically increased by inflation. It rises only when investment growth and the balance support a larger percentage amount, or would rise in practice if the policyholder changes the percentage within the rules. A provider may use specific valuation dates, payment timing and rounding that differ from this monthly model.

First-year income example

With R3 million capital and a 5% drawdown, first-year annual income is R150 000, or R12 500 per month before tax. That arithmetic is independent of the return assumption because the first draw is set from the opening value. Return affects the balance available for later anniversaries.

If the portfolio returns 7% after investment fees in a smooth path, the balance may grow despite the 5% draw. In real markets, returns arrive unevenly. A large early loss combined with continued withdrawals can permanently reduce the capital base, even if the long-run average later recovers.

Sequence-of-returns risk

Two retirees can earn the same average return over twenty years and have different outcomes when the order of gains and losses differs. Withdrawals after an early decline sell more units at depressed values, leaving fewer units to participate in recovery. A constant 7% line cannot show that sequence risk.

Run lower-return and negative early-stress scenarios, and maintain liquid reserves appropriate to the plan. A sustainable strategy considers investment mix, drawdown flexibility, essential spending and longevity rather than relying on one average-return result.

Inflation and today’s-rand capital

The today’s-rand output divides projected end capital by cumulative inflation. R4 million in twenty years can buy materially less than R4 million today. The same principle applies to income: a nominal payment that rises slowly can lose purchasing power even when its rand number is higher.

Inflation is entered separately from investment return. Do not subtract inflation from return and also use the real-capital output, because that would count inflation twice. Test several inflation scenarios for food, healthcare, housing and services relevant to the retiree’s budget.

Fees and return assumptions

The return field should be after the investment fees already allowed for. Platform, advice, administration and portfolio costs reduce what remains available for income and growth. Effective Annual Cost disclosures and provider quotations can help build a supportable assumption. Do not enter a gross fund return and ignore recurring charges.

Past performance is not a forecast. A higher expected return usually requires accepting more risk and volatility. Do not raise the assumption until the projection produces a desired income. Link it to the actual portfolio and stress test disappointing outcomes.

Tax and estate treatment

Living-annuity income is generally taxable in the recipient’s hands under normal income-tax rules, with PAYE withholding based on the provider’s process and SARS directives or tables. The page reports before-tax income because complete annual taxable income, rebates and medical credits are not entered.

On death, nominated beneficiaries can have choices under the product and tax rules, and outcomes differ from an ordinary estate asset or guaranteed annuity. Keep nominations current and obtain estate and tax advice. The displayed capital is a projection, not a guaranteed death benefit.

Using the projection responsibly

Start with an essential-spending budget, other guaranteed income and expected tax. Compare the required gross draw with the permitted range and run lower returns, higher inflation and longer horizons. A plan that works only at the central assumption has little resilience.

Review actual balance, income and expenses at every anniversary. A qualified financial adviser can compare living and guaranteed annuity combinations, fees, investment risk and family needs. The calculator is a transparent scenario, not personal financial advice or a provider quote.

Payment frequency and cash flow

Providers can offer monthly, quarterly, half-yearly or annual income frequencies subject to product rules. This model always divides the annual draw into twelve month-end payments so results are comparable. A different payment date changes the exact time money remains invested and can create a small balance difference.

Align income frequency with the household budget and keep enough cash for irregular bills. Choosing annual payment does not increase sustainable annual income; it only changes timing. Confirm provider cut-off dates and bank details before an anniversary change.

Combining income sources

A retiree may receive a living annuity, guaranteed annuity, employment income, rent and state or private benefits. Tax is based on the combined facts, and several providers can each withhold without seeing the full picture. Build a consolidated annual cash-flow and tax forecast rather than treating the living-annuity payment as the only income.