A smarter way to structure
retirement income

While both living and guaranteed or life annuities are designed to provide retirement income, they function on fundamentally different foundations. A living annuity is an investment-led product: your capital remains active in the market, allowing for both growth potential and the flexibility to adjust your drawdown.

In contrast, a guaranteed annuity is an insurance-led solution. It provides a fixed, rand-denominated income for life, regardless of market performance. However, this certainty comes at the cost of flexibility – once established, the income structure is rigid and tied to the claims-paying ability of the insurer.

While living annuities have been the preferred choice for many South African retirees over the past 20 years, guaranteed or life annuities have recently regained popularity, largely due to the rates on offer moving higher over the past few years. One of the key benefits of a life annuity is that you cannot outlive your savings – the insurer assumes that risk. However, there is an important trade-off: upon your death, any remaining capital is retained by the insurer rather than passed on to your beneficiaries.

There is, however, a way to secure a predictable income stream for a period of time without ultimately forfeiting your capital – by locking in bond rates via a living annuity.

How does it work?

When you buy a conventional guaranteed annuity, a life insurance company will offer you various rates for different options (for example, no annual increase, an increase of 5% per year, an inflationary increase, or various guaranteed scenarios). With this annuity, you’ll be certain of your expected monthly income, based on your quoted rate, which remains fixed.

The life insurance company will typically purchase long-dated individual government bonds with your retirement funds to match your desired income stream (also called your ‘liability’). It should be noted, however, that since annuity rates are directly linked to long-term bond rates, if you buy a life annuity when rates are low, your income, while guaranteed, will also be low.

With a traditional living annuity, your funds are generally invested in a portfolio of unit trusts aligned to your risk profile. Unlike an individual bond, however, a unit trust has no maturity date – it effectively has perpetual duration. In a bond fund, for example, bonds that mature are continually replaced with new ones in line with the fund’s mandate. This means the income generated by the investment is less certain over time.

The third option of locking in bond rates within a living annuity essentially replicates the investment strategy used by life insurance companies – matching your assets with your current and future liabilities. Instead of investing in bond unit trusts, the living annuity invests directly in individual bonds, providing greater certainty over both returns and income generation.

Purchasing government-guaranteed bonds allows investors to make decisions based on known returns rather than projected outcomes. Unlike a life annuity, however, a living annuity also offers flexibility. If bond yields are unattractive relative to inflation, investors may choose to wait until rates become more compelling.

In addition, any ‘surplus’ capital after meeting income requirements can be directed towards other financial goals. For example, if you invest R10 million in an R2037 bond, the yield is fixed at 9.1% per annum until 2037. If your required income is only 4.5% per annum, a surplus exists.

In broad terms, only around 50% of the capital would need to be allocated to the R2037 bond to meet an income requirement of R450 000 per year. The remaining capital can then be directed towards other objectives – such as inflation protection or reducing sovereign risk exposure by investing in local and global equities that serve as the most effective long-term inflation hedges.

Why choose bonds?

Bonds are a cornerstone of many conservative investment strategies because they offer predictable returns and typically lower risk than equities. They also provide regular interest payments, making them a potentially reliable source of retirement income.

That said, bonds are not entirely risk-free. Their capital value can fluctuate, and local bonds remain linked to the strength and stability of the South African government. There will be some risk involved, albeit very low (this risk would be the same for both a life annuity and for locking in bond rates within a living annuity).

At Sanlam Private Wealth, we’ve curated a range of bonds with varying maturities and competitive yields to suit different investment horizons and income needs. Our team can tailor a retirement solution that balances reliable income with the opportunity for continued capital growth.

We’ll work closely with you to understand your financial objectives and craft a personalised solution designed not only to support your retirement income needs but also to help preserve your wealth for future generations.

Take the next step

Investing in bonds can play an important role in a well-structured retirement strategy. To learn more about how our bond offerings can benefit you, please contact:

Yash Raghavjee (CFA, CMT): YashenR@privatewealth.sanlam.co.za

Guy Allan (CFA, CAIA): GuyA@privatewealth.sanlam.co.za