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What is the difference between a retirement annuity and a living annuity?

what is a retirement annuity

"The information and answers supplied in this section do not constitute advice as defined by the Financial Advisory and Intermediary Services Act, 37 of 2002."


I have a retirement annuity and life cover with Discovery. I resigned from my job and have to withdraw my provident fund. I want to transfer the lump sum to my retirement annuity. My financial advisor sent me Discovery forms with an option to invest in a life retirement annuity. I am confused, because I thought I have to invest in a retirement annuity fund. What is the difference between a retirement annuity and a living annuity?



When you withdraw from your current provident fund, you have choices as what you can do with that money. You do NOT have to invest in a retirement annuity. These are your options:

1. You can cash in. We strongly recommend that you do not do this, as this money is ear-marked for your retirement, or your dependents, and nothing else. If you cash in, you will pay lump-sum tax on the proceeds.

2. You can transfer this money to your new employer’s pension or provident fund, tax free.

3. You can preserve this money in a pension or provident preservation fund, but you cannot make further contributions (only further transfers). There is no tax on transfer.

4. You can transfer to a retirement annuity fund, also free of tax.

Understand that with a provident or provident preservation fund, you are entitled to claim your entire proceeds as a cash lump sum on retirement. If you transfer to a pension fund, a pension preservation fund or a retirement annuity, you must two-thirds to buy an annuity, so you give up some flexibility by transferring the proceeds to a retirement annuity.

There are essentially two types of retirement annuities: policy-linked, underwritten retirement annuities issued by life companies, and new-generation retirement annuities that are not underwritten, and are issued by asset managers such as Allan Grey or 10X Investments. The former are typically very expensive and restrictive. You typically pay high fees, and if you wish to stop contributing, or change the level of your contribution, you run the risk of incurring significant penalties. New-generation retirement annuities are far more flexible in this regard, and if you purchase them direct (ie not through a broker), there should be no termination penalties.

In making your decision, understand the critical importance of fees on the long-term investment outcome. Your retirement annuity is unlikely to generate more than a 5% real (after-inflation) return over the long term. If

you pay fees of 2% pa, you reduce that return by 40% or more! Over 40 years, this will halve the real value (ie purchasing power) of your pension. Make sure your broker discloses all the fees you will be paying (including his own).

As a general rule, separate your retirement product and your life insurance products. You do not get the life cover for free, it comes off your contributions, ie you save less towards retirement. And often the cost of that life cover is higher than if you bought it separately. Transparency tends to be poor in these products, so you do not see how much goes towards life cover, and how much towards savings. Beware of complex products that you do not properly understand; this complexity does not serve your interests, but it will likely push up your costs. Please ensure that you speak to a financial adviser who is looking after your interests, not his/her own.


July 21, 2015 at 9:56 am, Motsei said:

Please help what is the difference between a life policy and a retirement policy and which one is better

July 24, 2015 at 1:08 pm, 10X Investments said:

Motsei, A life policy is an insurance product that protects your dependents should something happen to you. They may then receive, say 2or 3x your annual salary, or a fixed rand amount, to provide for their financial needs. A retirement policy is a savings product that helps you save for your retirement. It is paid out to you when you retire (earliest age 55). If you pass before you claim it, the death benefit is paid out to your financial dependents. These two products serve different purposes and therefore it is not a question of which one is better, but rather which one serves your needs better. Ideally, you should have both, the one to provide for your family and the other to provide for your retirement.

April 22, 2014 at 8:18 am, Ian said:

Can I re-invest my pension benefits? Dear Rashieda, my wife is busy retiting form W Cape Dept of Education( WCDE ) and would like to take one third tax free and invest rest of her pension benefits in a Retirement Annuity Fund at Old Mutual upon recommendation of our Finanacial Broker. The Govt Pension Administration Agency( GPAA ) is now asking whether this is an Investment or a Annuitity fund. GPAA says that if one choose an Investment Fund then it counts as a Withdrawal and one cannot have a One Third Cash withdrawal option as well.

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