Living Annuity vs Guaranteed Annuity at Retirement: How to Choose
By Freddy Niekerk · Published 22 September 2026 · RunYourNumbers
The choice you cannot avoid at retirement
If your retirement savings sit in a pension fund, provident fund, or retirement annuity, at least two thirds of the retirement component has to buy you an annuity when you retire (unless your total balance is small enough to fall under the R360,000 de minimis threshold, in which case you can take it all in cash). That is not optional and it is not a suggestion. The only real decision left is which kind of annuity.
There are two broad options: a guaranteed annuity (also called a life annuity), where an insurer pays you a fixed or predictable income for the rest of your life, and a living annuity, where your money stays invested and you draw an income from it yourself. Most retirees have never had to think about the difference until the day they actually retire, by which point the decision is largely irreversible.
Guaranteed annuities: the insurer takes the risk
With a guaranteed annuity, you hand your retirement lump sum to an insurer in exchange for a monthly income they promise to pay for as long as you live, no matter how long that turns out to be or what markets do in the meantime. You can choose options that build in features like a spouse's pension continuing after your death, or an annual escalation to keep pace with inflation, but each of those features reduces the starting income you get, since the insurer is pricing in the extra risk it's taking on.
The trade-off is that you give up control of the capital. Once you've bought a guaranteed annuity, that money belongs to the insurer's pool, not to you, and it generally cannot be left to your heirs when you die (unless you specifically selected a guarantee period or a spouse's pension option). In exchange, you get certainty: the income doesn't move with the market, doesn't run out early if you live a long time, and requires no ongoing decisions from you.
Living annuities: you keep the capital and the risk
A living annuity works differently. Your retirement capital stays invested, in a portfolio you (or your financial adviser) choose, and each year you select a drawdown rate, the percentage of the remaining balance you withdraw as income. South African regulation sets the legal drawdown range at 2.5% to 17.5% a year, and you can adjust it annually within that band as your needs change.
The upside is flexibility and control: the capital is still yours, it can keep growing if markets perform, and whatever remains when you die passes to your beneficiaries rather than disappearing into an insurer's pool. The downside is that none of that is guaranteed. If you draw too much, too early, or markets underperform for a stretch, the balance can shrink faster than it grows, and there is no insurer standing behind the income if it runs out.
Why the drawdown rate is the real risk in a living annuity
A living annuity's biggest danger isn't a market crash on its own, it's a drawdown rate that's too high for what the underlying investments can sustain. Research based on South African market conditions generally puts a sustainable long-term drawdown rate at 4% to 5% a year, particularly early in retirement when the money still has decades to last. The legal maximum of 17.5% exists, but drawing anywhere near it depletes most portfolios within a few years.
The mechanics are straightforward: at a 5% drawdown, a R4,000,000 living annuity balance pays out R200,000 a year, or roughly R16,667 a month, before tax. If the underlying investments return more than 5% a year on average, the capital can grow even while paying that income. If they return less, or if you draw more than 5%, the balance erodes, and each future year's income is calculated off a smaller number.
Worked comparison: the same lump sum, two different outcomes
Take a R4,000,000 retirement lump sum going toward an annuity. A guaranteed annuity from an insurer, priced off current annuity rates, life expectancy, and any escalation or spouse's pension option chosen, might offer somewhere in the region of R25,000 to R30,000 a month for life, with the exact figure depending entirely on the insurer's quote at the time and the options selected, since guaranteed annuity pricing varies by provider and isn't something a generic calculation can substitute for.
A living annuity on the same R4,000,000, drawing at a sustainable 5%, pays out roughly R16,667 a month, lower than a typical guaranteed quote, but the R4,000,000 stays invested and can keep growing, and whatever's left when you die goes to your beneficiaries. The guaranteed annuity's higher starting income reflects the insurer pooling longevity risk across many retirees; the living annuity's lower starting income reflects that you're keeping the capital and the risk that comes with it.
You do not have to choose only one
It's a common misconception that retirement forces an all-or-nothing choice. In practice, you can split the required two thirds between a guaranteed annuity and a living annuity in whatever proportion suits you, using the guaranteed portion to cover essential fixed expenses (rent or bond, medical aid, groceries) with certainty, while the living annuity portion stays invested for growth and flexibility, and for whatever you want to pass on.
There's also a hybrid product some insurers offer, sometimes called a with-profit or smoothed-bonus annuity, that sits between the two: it still draws down like a living annuity but pools some investment risk with other policyholders to smooth out the bad years. Whichever mix you're considering, this is exactly the kind of decision worth taking to a licensed financial adviser before retirement, since the choice is largely permanent and the numbers involved are life-sized.
What actually determines the right mix for you
Health and family longevity matter more than most people expect: a guaranteed annuity is worth more, pound for pound, the longer you're likely to live, since you're being paid for as long as you're alive regardless of what the insurer's own actuarial tables assumed. Other savings outside the retirement system, a paid-off home, other investments, a spouse's separate income, also change how much certainty you actually need from the annuity itself versus how much risk you can comfortably carry.
Running the numbers on your own Two-Pot Retirement Calculator projection first gives you a realistic sense of what lump sum you're actually working with at retirement, which is the number every annuity conversation starts from.
Want to see this in action? Try the Two-Pot Retirement Calculator.
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Frequently asked questions
What is the difference between a living annuity and a guaranteed annuity?
A guaranteed annuity (life annuity) pays a fixed or predictable income for life, with an insurer carrying the investment and longevity risk. A living annuity keeps your capital invested and lets you choose a yearly drawdown rate between 2.5% and 17.5%, with you carrying the risk that the money could run out if drawn down too fast or if investment returns underperform.
Do I have to buy an annuity with my whole retirement fund?
No. At least two thirds of your retirement component has to buy an annuity (guaranteed, living, or a split of both); the remaining third can generally be taken as a cash lump sum, subject to the retirement lump sum tax table. If your total retirement interest is below R360,000, the de minimis threshold, you can take the entire amount in cash instead.
What is a safe drawdown rate for a living annuity?
The legal range is 2.5% to 17.5% a year, but research based on South African market conditions generally puts a sustainable long-term rate at 4% to 5%, particularly in the earlier years of retirement. Drawing consistently above that carries a meaningful risk of depleting the capital before the end of a 25 to 30 year retirement.
Can I switch from a living annuity to a guaranteed annuity later?
Yes, moving from a living annuity to a guaranteed annuity is generally allowed at any time. The reverse isn't possible: once you've bought a guaranteed annuity, that decision is permanent, since the capital has transferred to the insurer in exchange for the income promise.
What happens to a living annuity when you die?
Whatever balance remains passes to your nominated beneficiaries, either as a lump sum or as a continued income. A standard guaranteed annuity, by contrast, generally stops paying out on death unless you specifically selected a guarantee period or a spouse's pension option when you bought it, which would have reduced your starting income in exchange for that feature.