Different Kinds of Pensions Provided

In this section we consider the main types of pensions offered by the insurance market. We explain what the key features of these pensions are. Of course, the final step is to match this with your own choice of preferred features for your pension.

The two main types of pension offered by the market are:

• “Life annuities”
• “Living annuities”

The pensions market offers many variations of these two annuities – this section focuses on the core features of these two main types of annuity.

Life annuities

A “life annuity” typically has the following features:

• The current amount of the monthly pension is guaranteed for the rest of your life. (This guarantee is provided by the insurance company which pays you the pension. The stronger the insurance company, the more this guarantee is worth.)
• On your death, typically a pension of between 50% and 75% of your own pension will be paid to your surviving spouse for the rest of her/his life. (You can choose the percentage pension that will be paid to your spouse after your death, when your own pension starts.)

A concern that is sometimes raised about a life annuity is that you don't get the full value of your retirement capital back if you and your spouse die soon after you retire. This is the "insurance premium" that you pay for the promise that your pension will be paid even if you live much longer than expected (e.g. to age 100).

• The pension should increase each year. Once an increase is granted, the new higher level of pension becomes guaranteed. (You can choose the basis on which the annual increase should take place. The increase could be a fixed percentage every year, or it could be variable depending on how well the insurance company’s investments perform – you can even choose a pension that increases in line with inflation, although this tends to be very expensive.)
• You require no investment expertise in managing such a pension. The insurance company providing the pension will manage the underlying assets on your behalf – you won’t even see the details of how the money is invested (these details are largely irrelevant to you, because your monthly pension is guaranteed by the insurance company).
• A “life annuity” pension generally has a low cost structure. Usually, most or all of the costs are taken into account and fixed when the pension is set up (when you retire).
• With a “life annuity”, you can decide at the outset on the basis on which your pension should increase each year, and the percentage pension that will be paid to your spouse after your death. However, you do not have the flexibility to change these terms once your pension starts to be paid.

The Fund's rating of a life annuity

Feature of a life annuity	Fund's rating	Reason for our rating
Choice	1	You only have choices at the start of the pension
You must have a high degree of investment expertise	0	Insurer makes all the investment decisions
Security	4	The current pension is guaranteed by the insurance company paying the pension. Future increases may or may not be guaranteed.
Inheritability	2	Your surviving spouse continues to receive a pension after your death.
Low cost structure	4	This is generally a cheap form of pension.

“Living annuity”

As from March 2024, retiring members have the option to take a Living Annuity from the Fund itself - your retirement capital stays invested in the Fund, and the Fund pays you a pension each month. If you are interested in this option, please ensure you read the section below, to understand Living Annuities, and then please read the Leavers' Pack (download from Home > Member Guides) to understand the in-Fund living annuity option and its terms and conditions, and the other pension options available to you.

A “living annuity” operates like an Investment Account, as is explained below.

• At retirement, your money (the part of your Fund retirement benefit that you do not take as a cash lump sum) is all invested in your Investment Account with an insurance company of your choice.
• Your Investment Account is credited with the investment returns (positive or negative) that the insurance company earns on your money.
• Importantly, you must decide how to invest your Investment Account – the insurance company may give you a wide range of investment choices. Of course, you may choose to receive expert advice in this regard.
• Each year, you need to decide on the level of your draw-down (what percentage of the total Investment Account you want to receive as a monthly pension income). The draw-down limit is set by SARS and is currently as follows: Minimum draw-down: 2.5% of the starting balance in your Investment Account. Maximum draw-down: The lesser of 17.5% of the starting balance in your Investment Account, or the amount of a single-life “life annuity” (with no guarantee and no increases) that can be secured with the living annuity capital. The insurance company will advise you what the maximum draw-down is. It is likely to be much less than 17.5%.
• When you die, your dependants take over your Investment Account. Those relatives that are financially dependent on you take over your Account first. When they die, the balance in your Investment Account can be paid to your financially independent children. In this way your retirement capital can have value beyond your death and that of your spouse.
• Your Investment Account can run out of money and you may be left with a very low income in retirement. This can typically happen if: the investment return you earn on your Investment Account is low; the monthly pension drawings you make from your Investment Account are too high; you (and your spouse) live much longer than expected.

All of these are significant risks with a “living annuity”.

• The cost structure of a “living annuity” is typically higher than that of a “life annuity”, as the investment fees are higher and you will also need to pay for the ongoing help that you receive from your financial advisor regarding your investment strategy and monthly pension drawings.
• You can change your mind and use your Investment Account to buy a “life annuity” to replace your “living annuity” before age 75. The earlier you do this, the more expensive the life annuity becomes – but the longer you wait, the more chance there is for things to “go wrong” with the living annuity.

The Fund's rating of a living annuity

Features of a living annuity	Fund's rating	Reason for our rating
Choice	3	You have the flexibility to vary your income and investment strategy each year
You must have a high degree of investment expertise	3	You will need to decide where your money is invested, although you may be helped by a financial advisor
Security	1	There is a risk of running out of money if investment returns are poor, if you draw too much pension, or if you live too long
Inheritability	4	Your surviving spouse continues to receive a pension on your death, and the remaining capital is available for your family after both of you are dead.
Low cost structure	1	This is a much more expensive structure – you will also need to pay your financial advisor out of your Investment Account.