Updated 14.08.2021

How to Choose the Best Retirement Annuity

A retirement annuity is a financial product that can help you earn an income in your retirement. You can design it as either a fixed or variable annuity. In addition to this, you choose how much you want to invest and the amount of income it will generate for you each year. Even so, this product comes with some flexibility, allowing you to improve your offer over time. The longer you expect to live, the more money you should put aside now. This is because your investment returns will earn interest over time and grow your account value.

An advisor often recommends a retirement annuity if they feel you may not have enough money saved up for your future or retirement years. This happens especially if other people who cannot work anymore, like children or parents, rely on your income.

Choosing the right retirement annuity is a very important decision. It can have significant repercussions on your financial situation in retirement. There are many factors to consider in choosing the best annuity for you. This article will guide you on how to choose the best retirement annuity in South Africa.

Types of Retirement Annuities in South Africa

Before choosing the best retirement annuity, you must understand the different types. There are five types of retirement annuities for South Africans. They include:

Government-issued Retirement Annuity Funds (RAF)

The first type of retirement annuity boasts the name “Government-issued RAFs.” These funds were established on July 1st, 1956. Since then have been part of the South African social security system. They are one of the most popular types of retirement annuities in South Africa. ETFs are funds that a company or organization—such as your employer—contributes to on your behalf. The funds ensure you have an adequate retirement income in the future.

This plan automatically enrolls most people who work for a company or institution. It takes in a significant number of employees into their organization’s RAF unless they choose not to join. You can also apply to join (or “opt-in”) after joining the company. Either way, they will take your contributions towards an RAF. They deduct it from your salary before your employer deducts tax. Your contribution towards an RAF is tax-free.

Retirement Annuity Fund (RAF)-Plus Accounts

The second type of retirement annuity in South Africa boasts the name an “RAF-Plus Account.” Several companies or organizations like the South African National Defense Force and the City of Cape Town, have established their RAF-Plus Accounts for their employees. They normally set these accounts up with one of the private insurance companies. The account works very much like ordinary RAFs. The only difference is that you do not need to boast employment by a particular company or organization to join them. Anybody who wants to join must meet certain criteria such as:

  • Being at least 18 years old
  • Earning a yearly income of less than R150,000

Retirement Annuity Individual Accounts (RAIA)

A “Retirement Annuity Individual Account” or RAIA is a provident fund. It allows you to open an account with an organization that offers such products. So, you should check whether your financial institution or bank offers this kind of insurance. You can make the payments to get access to some retirement annuity benefits in six months if they do.

Of tax legislation, RAAIs RRSPs stand out, but there are no limits on how much money one can invest in them. The only limit is the amount of money you have. So, while you cannot contribute over 25% of your annual income towards an RAAI or RRSP, you can contribute more than that as long as it doesn’t eat into your savings.

Retirement Annuity Market Pensions (RAMPPs)

A “Retirement Annuity Market Pension” or RAMPP is like an RAAI. The only difference is that the money you spend on this type of plan must come directly from your bank account. They do not accept any contributions made by your employer. You can open an account with any financial institution in South Africa and put money into it. There are no restrictions on age or income. The only thing that can stop you from opening a RAMPP is if you already have an RAAI or RAF.

Retirement Annuities with Life Assurance Policies

The fifth and final type of retirement annuity in South Africa is simply some form of life assurance policy connected to your bank account. It allows you to pay into it over time without making a one-off payment. You may also use this option if the other four options are not available for whatever reason. That is if you don’t work for a company that offers RAFA benefits.

How to Choose an Annuity Option

When choosing between the five types of retirement annuities available in SA, consider the kind of lifestyle you would like to live when you retire (especially if there’s no spouse or partner to share your life with). Consider how much money you can afford. This will enable you to pay into each of the five types of retirement annuities outlined above and scale back on what you spend for a few years. Neither reckless spending nor frugality will get you anywhere in the long run. Be realistic about where and when you want to retire so that your investment matches your plans.

Choose Between Lump Sum and Installment

You need to ask yourself whether you want a lump-sum amount or installment payment from your pension fund. Lump sums may not be ideal because they could give you stomach aches. This is because we usually invest them in risky assets that offer higher returns than bonds. Yet, many financial experts know lump sums present the best option. But, if you want to achieve financial security, you should choose installment payments. This is because they help provide a steady stream of income for life.

Calculate Retirement Annuity Fees

Before choosing your desired pension plan, it is important to calculate expenses and fees that can affect what comes out of your annuity payments. Financial experts advise people who want to invest in pension funds with higher returns to consider products with lower charges. This is because you can make a significant difference in your net benefit amount. It pays off if you check whether any product has an annual management fee or other service fees charged by the fund manager from time to time over your investment term. Note that the calculated percentage gets deducted from your portfolio value before you can get the retirement benefit from an annuity.

Check Inflation Level and Taxes

Inflation is something that most retirees worry about. It refers to a situation where the cost of living increases faster than expected. This results in declining purchasing power. Changes in the price index measure inflation on the cost of goods such as fuel, food, motor vehicles, and clothing. So, annuity investors must think about inflation when picking their pension fund investments. You should consider taxation matters since income paid out by retirement plans is taxable over a marginal tax rate. The rate varies, depending on how much you earn each year during retirement years. Yet, rates are subject to change. So, it is wise to speak with an accountant who knows how annuity investments get recommended.

Get a Guarantee from the Company

Retirement plans are too important for you to leave them in the hands of an insurance company. So, you need to check whether a pension plan offers a guaranteed payout. This will protect your investment against bad financial times and ensure that you can live comfortably throughout your retirement years.

The best way to get peace of mind when choosing annuities in South Africa is to invest with companies that come up with fixed income payments that last for many years. This is where any other market conditions won’t affect them. Besides, there should also be a limit on how many benefits paid out by your chosen product can increase annually. This is because inflation rates change over time, and you can observe this in your payment.

Think About Tax Savings and Benefits

As mentioned earlier, you need to think about taxation when choosing a pension plan. There are specific annuities in the South African market that come with tax-free benefits. The government also offers certain incentives for individuals who invest their funds in retirement plans. The rules change as time goes by. Still, until now, an individual will get some level of protection against increasing income taxes. That is if they put their portfolio value into annuity payouts rather than other investment vehicles such as stocks or bonds.

Certain types of annuities can offer 49 percent tax breaks on any growth. This is more than you would earn on other financial products. It may also be best to get benefits like this even if the government does not charge tax on annuity income.

Check the Interest Rate on Offer from Different Providers

Fixed interest rates do not determine retirement annuity interest rates on offer in South Africa. The rate of return for your retirement annuity will depend on the performance of the underlying investments, which may vary. Higher-risk investment classes provide a greater potential return. They also entail more volatility than lower-risk investment options. So, it is important to watch what might suit your needs best when choosing a provider and product to suit you. With so many providers offering various products with varying levels of risk, there’s something for everyone–as long as you know how to find it.

Consider Extra Features of Investment Plans

Retirement funds provide a great opportunity for those who want to grow their wealth and protect their financial future. Individuals need to ensure that they are choosing the right product. Some retirement plans also come with flexible features which can be quite useful when purchasing an annuity in South Africa. Some of the features include:

  • Life expectancy assessment

Suppose you’re planning to invest in pensions. In that case, it pays off if you check your life expectancy. This will help determine how much money you will earn from your payouts compared with the premiums invested overtime before retirement age.

  • Guaranteed lifetime withdrawal benefit

This is another important feature that provides peace of mind. This is because it ensures that they will guarantee your payouts for the rest of your life. Guaranteed lifetime withdrawal benefit offers a safety net. That is if you decide to take out money from your retirement plan and become satisfied with the final amount you get at retirement age. It also protects those who want their estate to get divided among family members after death. For example, if an individual dies before retirement, their spouse will still receive monthly annuity payments until death.

The Six Best Retirement Annuity Providers in South Africa

To get a good deal on an annuity, you need to get an offer from the best retirement annuity providers in South Africa.

Aon Retirement Solutions

Aon offers a range of products from single premium immediate annuities to deferred income annuities. They offer flexible options for the withdrawal or drawdown of your cash value, which could get taken as a lump sum or in regular payments.

Liberty Life

Liberty offers fixed-rate lifetime guaranteed level premiums. It also allows you to choose between taking your money as an annual income payment or in one upfront payment at the end of your contract term. They have developed the product with capital safety preservation and longevity certainty. This is their central focus while maintaining flexibility for the client. Their motto reflects these benefits: “Dare to live your dream.”

Gerber Life

Gerber offers a range of products. The products include immediate annuities and deferred income annuities. These boast life guarantees and offer tax-free pension payments. Nedbank (a member of the ABSA group underwrote all policies in South Africa), so you can be confident that it is safe. They also have an option where you can choose to take your payment annually at a certain age or on specific dates of your choice. [you pay more premiums now if you want to take regular payments earlier?].

Prudential Life

Prudential Life has six different types of annuity plans

  • Immediate annuities
  • Deferred income annuities
  • Step-up income annuities
  • level-premium lifetime guarantees annuities
  • Fixed-premium lifetime guarantee annuities
  • Unitized deferred income annuities

They are a relatively new company but boast that they have been able to cover the majority of their clients’ needs and requirements for retirement with six distinct options.

Standard Life

Standard Life offers six different plans:

  • Combination of immediate/deferred plans
  • Immediate or deferred single premium plans
  • Immediate/income drawdown (step-up) plans
  • Deferred income products with full member control of investment selection
  • Flexible payment options at age 55 or 60
  • A pension fund accumulation plan which. This allows you to transfer any pension savings from elsewhere into one lump sum [or you can leave it where it is?].

They also offer a range of investment options that are not recommended for everyone. They only suit certain people depending on their temperament, goals, and attitude towards risk.

Standard Bank

Standard Bank offers six new retirement products:

  • An immediate annuity
  • A deferred income product that allows you to defer your annuity until after the death of your spouse or any children you may have
  • Two different pension fund accumulation plans [this means that they invest it in stocks/bonds etc.?]
  • An income drawdown plan
  • A flexible payment option plan. Both immediate and deferred income annuities payout tax-free at all times.

Benefits of Retirement Annuity

Getting a retirement annuity has a lot of advantages. They include:

Guaranteed Capital

Because insurance companies with strong financials back it, investing in a retirement annuity means that your capital becomes guaranteed. This increases the peace of mind you get from knowing that your income won’t suddenly come crashing down around you. At least not because of any actions taken by the insurer.

Increased Monthly Income

Since retirement annuities get traded on the stock market, you also enjoy increasing your income from month to month. This allows for a much better quality of life than before when retirement annuities got only issued by government or insurance companies.

Tax Benefits

Retirement annuities have a lot of great tax advantages. For starters, you can deduct your contributions to the plan from taxable income up to some amount specified by current legislation. So, when you contribute, it means that there is even more money for retirement! This deduction also applies if the contribution exceeds said limit and carries forward into future years where they are deductible as well (with any other type of retirement lump sum or pension). And what about investment returns? They’re not currently taxed either, making them an extremely attractive option for people who want their assets kept out of sight until life after work needs to be prepared for. Talk with a financial advisor today before handing over all those earnings taxes this year!

Protection from Creditors

It protects your hard work to save for your retirement against any disaster, so you can rest easy knowing that you will have enough money when it counts.

Deferred Distribution

Another nice perk of annuities is their tax-deferred status. With other popular retirement investments, you’ll have to pay back when they reach the maturity date. With annuities, though, you don’t owe a penny to the government until you withdraw the funds. That aspect gives owners some control over when they pay taxes. Leaving money in a deferred annuity can also help reduce your Social Security taxes, as you have less taxable income when you delay withdrawals.

Use Retirement Interest to gain Annuities at Retirement

Annuities are a type of income that retirement funds often provide for retirees. Annuities can be received directly from the fund or purchased using money in the member’s account with an annuity provider such as South African registered insurers.

Applying Tax on Withdrawals of Retirement Interest When an Individual Ceases to Be a Tax Resident

When an individual becomes a non-resident of South Africa, retirement funds are not always subject to withdrawal tax. This is true if the individual’s investment in a South African retirement fund is not withdrawn until they die or retire from their job. Section 9(2) (I) deems these amounts to be from a South African source and thus remain within the jurisdiction of the country’s tax laws despite the person no longer living there.

Disadvantages of Retirement Annuity

Despite all the benefits you’ll enjoy when you get a retirement annuity, you have to be aware of the disadvantages of this financial product.

Inflation Risk

Annuities can provide for a lifetime income, but it does not guarantee the rates of return to increase with inflation. For example, medical expenses have been skyrocketing in recent years, and they will keep increasing past retirement age.

Funds Lock Up

Your funds get locked up (non-transferable) for ten years or more when investing in an annuity. For instance, most traditional pension plans give retirees after age 55 three options:

  • rolling over their pensions into a lump sum
  • Doing nothing and continuing on the same plan
  • Buying themselves an annuity that pays them a monthly income for life until death. This means that retirees can’t touch their money during that time.


One of the cardinal rules of investing is not to buy a product you don’t understand. Annuities are no exception. Over the past few years, the insurance market has exploded with a slew of new, often exotic variations on the annuity. Some, such as the equity-indexed annuity, come with fees and limitations so complex that few investors fully understand what they’re getting into.

Insufficient Retirement Savings

The retirement crisis could be one of the biggest problems in modern times. After moving from defined benefit to defined contribution schemes, fewer people have enough savings for their current living standard. This problem has worsened every year, with more households forced into a lower lifestyle after they retire. There is no way that annuities can fix it all. But research shows some good news among those who switch jobs. Less than two-thirds can save any excess money when leaving an employer.

South Africans should always consider their retirement annuity options before deciding. The choices you face will depend on several factors, including the amount of money you want to invest, your age, and how long until you retire. And remember that there are two types of annuities, immediate or deferred. So, think about which one is best for you and go with it.