At retirement, South African pension and provident fund members must convert at least two-thirds of their accumulated savings into a regular income. The two main vehicles for doing this are a living annuity and a life (guaranteed) annuity — and choosing between them is one of the most consequential financial decisions most people make.
They are fundamentally different products. A life annuity is an insurance product that guarantees income for life, regardless of how long you live, at the cost of surrendering your capital to the insurer. A living annuity is an investment product that keeps your capital under your control, allows flexible income drawdowns, and passes residual capital to your beneficiaries — at the cost of investment risk and the possibility of running out of money if you draw too much.
Both generate taxable income. The tax treatment differs in important ways.
Tax note: This article is general information for South African taxpayers. It is not tax, legal, or financial advice. Confirm current SARS guidance and speak to a registered tax practitioner before acting on complex facts.
Key Takeaways
- Both living and life annuity income is taxed as ordinary income at your marginal PAYE rate — there is no special “retirement income tax rate.”
- Living annuities provide a significant advantage: investment growth inside the structure is completely tax-free (no CGT, no interest tax, no dividends tax). Tax is only paid when you draw income.
- From 2026, you may commute (cash out) a living annuity in full if its value falls below R150 000, up from the previous R125 000 threshold — the cash-out is taxed using the retirement lump sum benefit table.
How Each Product Works
Life annuity (guaranteed annuity): You transfer a lump sum (or your retirement fund proceeds) to a life insurer. The insurer guarantees you a fixed monthly income for the rest of your life, regardless of how long you live. If you die the following year, the insurer keeps the remaining capital (unless you have selected a joint-life option that continues payments to a surviving spouse, or a guarantee period). You have no ongoing investment decisions to make and no risk of outliving your money — but you sacrifice all residual capital and have no flexibility to adjust income once the contract is signed.
Living annuity (investment-linked annuity): You transfer a lump sum to an approved living annuity provider and remain the nominal owner of the investment. You choose the underlying investments (unit trusts, multi-asset funds, cash). You draw an income each year within statutory limits — between 2.5% and 17.5% of the residual capital value — adjustable annually on your policy anniversary. The capital remains yours and passes to nominated beneficiaries on death. The risk is that poor investment returns or excessive drawdowns can deplete the fund before you die.
How Both Are Taxed
Income tax on withdrawals — both products: Both living annuity income and life annuity income are taxed as ordinary income under South Africa’s income tax framework. PAYE is withheld by the provider at source, in the same way an employer deducts PAYE from a salary. You receive a net income payment and an IRP3 certificate at year-end.
Your annual retirement income from either annuity is combined with any other taxable income — investment interest above the exemption, part-time work income, rental income — and assessed at your marginal tax rate.
The tax-free thresholds and rebates for individuals still apply:
- Under 65: R95 750 per year tax-free (2025/26 threshold)
- Age 65–74: R148 217 per year tax-free
- Age 75+: R165 689 per year tax-free
Many retirees whose sole income is a modest annuity fall below the taxable threshold or in low brackets — their effective tax rate is lower than their marginal rate once rebates are applied.
The living annuity tax advantage — internal growth: While income from both products is taxed the same way, living annuities offer a structural advantage that life annuities do not: growth inside the living annuity structure is completely exempt from tax.
- No capital gains tax on investment growth within the fund
- No tax on interest income earned within the fund
- No dividends tax on dividends received within the fund
This means the living annuity’s underlying investments compound on a gross basis — without SARS taking a portion of returns annually. Tax is only triggered at the point of withdrawal.
Citation capsule: Living annuity income is taxed as ordinary income (PAYE) at the retiree’s marginal rate, but investment growth inside the living annuity structure is completely exempt from CGT, interest tax, and dividends tax — providing a significant long-term compounding advantage over equivalent investments held in a taxable account. Life annuity income is similarly taxed as ordinary income; the insurer retains the capital and no estate benefit applies unless a joint-life or guarantee period is selected (10X Investments, “Choosing Between a Living Annuity and a Life Annuity”; Moneyweb, “Living Annuities Decoded”; SARS income tax framework).
Related: retirement annuity tax deductions
Drawdown Rules for Living Annuities
South African legislation sets the minimum and maximum income a living annuity may pay each year. These limits prevent retirees from either starving the fund (too little income) or depleting it unsustainably (too much income).
Statutory drawdown range: 2.5% to 17.5% of the fund value per year.
You select your drawdown percentage once per year, on your policy anniversary. The selection then applies for the next 12 months regardless of market movements. The rand income you receive reflects the selected percentage applied to the fund value on the anniversary date.
The drawdown rate dilemma: Financial planning practitioners generally regard a 4%–5% drawdown rate as the sustainable long-term range for a balanced portfolio — enough income to live on, while preserving capital for future years and inflation protection. The higher end of the statutory range (10%–17.5%) depletes capital rapidly and is typically only appropriate for retirees who have other income sources or wish to draw down the full fund over a defined period.
A drawdown rate that exceeds investment returns after fees and inflation is the primary risk of a living annuity: the fund value declines over time until eventually depleted.
Practical illustration of drawdown rates:
| Fund Value | 4% Drawdown | 6% Drawdown | 10% Drawdown | 17.5% Drawdown |
|---|---|---|---|---|
| R2 000 000 | R80 000/yr | R120 000/yr | R200 000/yr | R350 000/yr |
| R1 500 000 | R60 000/yr | R90 000/yr | R150 000/yr | R262 500/yr |
| R1 000 000 | R40 000/yr | R60 000/yr | R100 000/yr | R175 000/yr |
What Happens at Death?
Living annuity: The residual fund value passes directly to nominated beneficiaries on death. Because the funds bypass the deceased estate, they avoid the delays of estate administration and are not subject to estate duty. Beneficiaries may receive the funds as a lump sum (taxed under the retirement lump sum benefit table) or continue in a living annuity in their own name.
This estate planning advantage — direct payment to beneficiaries, no estate duty — makes a living annuity a useful tool for reducing the taxable value of an estate.
Life annuity: Unless specifically structured as a joint-life annuity (which continues payments to a surviving spouse) or with a guarantee period (which continues payments for a specified number of years regardless of death), the capital reverts to the insurer on the annuitant’s death. There is no residual benefit to beneficiaries. This is the price of the longevity guarantee — the insurer absorbs mortality risk, but retains the capital of those who die early to fund payments to those who outlive their savings.
Citation capsule: Living annuity capital bypasses the deceased estate on death, passing directly to nominated beneficiaries free of estate duty — making it a useful estate planning instrument for retirees who want to transfer residual retirement assets to heirs efficiently. Life annuities generally revert to the insurer on death unless structured as joint-life or with a guarantee period. The contrast in estate treatment is one of the most significant practical differences between the two products (10X Investments, Living Annuity FAQs; Moneyweb, “Living Annuities Decoded”; Holborn Assets SA, “Key Differences Between Retirement Annuities and Living Annuities”).
Related: estate duty and inheritance tax
The 2026 Budget Changes
Two changes affecting living annuities came into effect from 1 March 2026, per the 2026 National Budget:
1. Commutation threshold increased to R150 000: A retiree may commute (convert to a lump sum and close) their entire living annuity if its value falls below R150 000 — up from the previous R125 000 threshold. The commuted amount is taxed under the retirement lump sum benefit table, which provides more favourable rates than ordinary income tax for amounts within the tax-free lump sum threshold (currently R550 000 cumulatively from retirement funds).
This change primarily affects retirees whose living annuity has been significantly depleted by high drawdown rates over time.
2. Annuitisation de minimis threshold increased to R360 000: At retirement, members of pension and provident funds must generally annuitise (convert to an annuity) at least two-thirds of their accumulated savings. The de minimis threshold — below which the full balance may be taken as a lump sum without annuitising — increased from R247 500 to R360 000 from 1 March 2026. Retirees with total retirement savings below R360 000 may receive the full amount as a taxable lump sum under the retirement lump sum benefit table.
Which Product Suits Which Retiree?
No single answer applies universally. The decision depends on three primary factors:
1. Risk tolerance: A life annuity eliminates investment risk entirely — the income is guaranteed for life regardless of market conditions. A living annuity exposes you to full market risk: a severe market decline reduces your fund value and, consequently, your future income. Retirees who cannot absorb market volatility in retirement should lean toward a life annuity or a blended approach.
2. Longevity expectation and health: Life annuities are actuarially priced — you are effectively pooling longevity risk with other policyholders. If you are in poor health or have a family history of shorter lifespans, a life annuity may not be in your financial interest (you may receive fewer years of income than the pooled average). If you expect to live well into your 80s or 90s, the guarantee protects against the risk of outliving your savings.
3. Desire to leave capital to heirs: A life annuity leaves nothing to beneficiaries (unless joint-life or guaranteed period options are selected). A living annuity preserves residual capital for heirs. Retirees who prioritise inheritance should lean toward a living annuity.
Quick decision guide:
| Priority | Lean Toward |
|---|---|
| Guaranteed income for life, no investment decisions | Life annuity |
| Flexibility, capital preservation, estate planning | Living annuity |
| Moderate risk, blended outcome | Combination of both |
| Poor health, shorter life expectancy expected | Living annuity |
| Uncertainty about outliving savings | Life annuity for part of income |
The blended approach: Many retirees in South Africa use a combination — converting a portion of savings into a life annuity (typically to cover essential monthly expenses: food, medical aid, utilities) and placing the remainder in a living annuity (for discretionary income and estate planning). The life annuity floor provides income security regardless of market conditions; the living annuity provides flexibility and an inheritance benefit.
Frequently Asked Questions
Can I switch from a living annuity to a life annuity later?
You can move from a living annuity to a life annuity at any point — use the living annuity capital to purchase a life annuity. This is irreversible: once you purchase a life annuity, you cannot convert back. You cannot switch from a life annuity back to a living annuity. The direction of conversion is one-way.
How is my living annuity income declared on my tax return?
Living annuity income is declared on the ITR12 under the “Annuity Income” section. Your annuity provider issues an IRP3(b) certificate at year-end showing the gross annuity paid and PAYE withheld. These figures are pre-populated on your eFiling ITR12 if the provider has submitted the certificate to SARS electronically.
What is the most common mistake retirees make with living annuities?
Drawing at too high a rate — typically above 6% annually — without sufficient investment returns to compensate. A retiree drawing 10% from a fund returning 7% per year after fees is depleting capital by approximately 3% per year. Over 15–20 years, this erodes the fund to zero. SARS requires a minimum 2.5% drawdown (preventing hoarding), but the upper limit of 17.5% can be accessed at will — the financial consequence of doing so is the retiree’s alone to absorb.
Does the living annuity count toward my estate for estate duty?
No. Living annuities that pay directly to nominated beneficiaries on death are excluded from the dutiable estate for estate duty purposes, because the funds are not owned by the deceased estate — they are directed by nomination. This is a meaningful estate planning advantage. If no beneficiary is nominated, the funds do form part of the estate.
If my living annuity is below R150 000, should I commute it?
Not necessarily — it depends on your other income and your marginal tax rate. The commuted amount is taxed under the retirement lump sum benefit table. If you have not used your cumulative R550 000 tax-free lump sum allowance from retirement funds, the full R150 000 may be received tax-free. If you have already used the allowance, the amount is taxed at progressive lump sum rates. Compare the tax cost of commutation against the administrative cost and complexity of maintaining a small living annuity before deciding.
The choice between a living annuity and a life annuity is not a question of which product is better — it is a question of which product fits your risk tolerance, longevity expectations, and estate planning priorities. Many South African retirees benefit from a combination of both. A financial advisor who is an FSCA-accredited retirement specialist is best placed to model the outcomes for your specific situation before you commit — this decision, unlike many in financial planning, is effectively irreversible for the life annuity portion.
Related: retirement annuity contributions tax
Sources: 10X Investments, “Choosing Between a Living Annuity and a Life Annuity” (10x.co.za); 10X Investments, Living Annuity FAQs (10x.co.za/living-annuity-faq); Moneyweb, “Living Annuities Decoded: Freedom, Risk and the Rules That Matter” (moneyweb.co.za); Holborn Assets South Africa, “Key Differences Between Retirement Annuities and Living Annuities” (holbornassets.co.za); Just SA, “How Do Annuities Work for Retirement in South Africa?” (justsa.co.za); Sanlamonline, “Key Takeaways from the 2026 National Budget” (sanlamonline.co.za); Moonstone Information Refinery, “Changes to CGT, Tax-Free Savings, Retirement Contributions and Donations” (moonstone.co.za); SARS, Budget 2026 FAQ (sars.gov.za). Retrieved 2026-06-24.