We often are asked this question or at least to explain the different types of annuity available here in SA.
Compulsory Purchase Annuities
These must be purchased with at least two thirds of the pension or retirement fund benefits at retirement. These annuities pay a pension for life. Provident Funds are excluded from this requirement but there is legislation still to be promulgated which will bring them in line.
Compulsory annuities come in the form of traditional annuities or living annuities or a combination thereof.
Traditional Annuities
A fixed guaranteed payment payable for life which terminates on your death. A minimum guarantee term can be included or this can be done on a joint life basis with the annuity terminating on the second death. An annual escalation provision can be included with a much lower initial payment.
The amount of annuity for a given capital sum will depend on age and prevailing annuity rates at the outset.
Living Annuities
Based on an underlying investment or investment portfolio, you can decide on the the annuity payable between 2.5% per annum and 17.5% per annum of the capital value. The annuity payment is subject to review once a year and is likely to vary depending on the performance of the investments to which it is linked. Unlike in the case of traditional annuities, the living annuity does not cease on death and may be passed on to heirs.
Voluntary Annuities
This is an annuity of your choice, where you invest a lump sum from any source from which you draw a regular income. You can invest for a fixed period – eg 10 years, or until death. Whereas the income from traditional and living annuities are fully taxed, voluntary annuities are partially tax free as part is a repayment of capital over the selected period.