Which pension best meets your needs

To decide which type of pension best meets your needs, you should first match up how you scored the different features based on your own preferences (in the earlier section titled “Choose the features that you attach the most value to”), with the key features of the main types of annuity.

Secondly, you should consider whether any special circumstances apply to you.

How you scored the features (your own preferences)

In this section you should compare the scores that you cast for each feature (based on your own preference) with the key features of a life annuity and a living annuity.

As a starting point, you should choose the type of pension that has the best “match” to the features you have voted for.

Special circumstances

If you are in poor health:

An important exception in your decision-making process is if you know that you are in poor health at the time when you retire.

In this case, a living annuity may be the most suitable pension form. “Life annuities” are usually priced based on a normal life expectancy - a life annuity is clearly an expensive option if you have a much shorter life expectancy than normal.

Of course, the key difficulty with this is that very few members have enough information to take the view that their life expectancy will be shorter than normal. People often under-estimate how long they will live after retirement, particularly with improving medical techniques and medical research.

If your “basic needs” pension is much lower than the total pension that you can secure

Some people may find that their “basic needs” pension is much lower than the total pension that they can secure with their retirement savings. This may apply to you, as the retirement benefits that the Fund provides are a lot more generous than those of most private-sector retirement funds.

It is easy to conclude that a “life annuity” (one that targets increases each year more or less in line with inflation) is the best type of pension to meet your “basic needs” income requirement. On the other hand, a living annuity might seem best suited towards meeting your “luxury needs”. (Providing inheritability for your independent children is generally a “luxury” – most South Africans have to leave their adult children to fend for themselves after they die.)

In this case you may choose to use a “life annuity” to provide your “basic needs” and a living annuity to cover your “luxury needs” (i.e. a combination of the two annuities). (SARS sets rules on when and how you can combine the different types of annuity – you will need to discuss this with a financial advisor.)

Quick guideline for choosing between the two pension types

If you need to draw more than 6 – 7% of your retirement capital in a single year to meet your basic needs, you should seriously reconsider whether a “living annuity” is suitable for you. A “life annuity” pension may be more suitable.

(This rule may not apply if you know that you are in poor health at your retirement, with a limited life expectancy, or if you are very old when you leave office.)

More than one pension?

As from March 2024, the Fund Rules allow you to split your retirement capital (the part that you will be using to provide a pension, after taking any cash portion) and to invest in more than one annuity (more than one pension) - for example, you could choose to invest part in a "life annuity" to give you a secure basic income, and the rest in a "living annuity" (whether inside the Fund or from an external provider) with the advantages that may bring you.

Legal Disclaimer

The information contained in this guide does not constitute advice by the Board of Trustees or by its advisors. If you need more information on how you can invest your retirement benefit, you should seek professional advice from a licensed financial advisor.