When you retire from a pension fund, provident fund, or retirement annuity in South Africa, at least two-thirds of the proceeds generally has to be used to buy an annuity, an income for the rest of your life. You have two broad choices for that income: a living annuity, where you control the investments and the drawdown rate, or a guaranteed annuity, where an insurer takes on the investment and longevity risk and simply pays you an agreed income for as long as you live. This article focuses on the guaranteed annuity option: how it works, the five main types available, what you can and can’t do once you’ve bought one, how the income is taxed, and what happens to it when you die.
The appeal is straightforward. In uncertain financial times, a guaranteed income feels safer than one that depends on markets and your own drawdown decisions. The trade-off is just as straightforward: guarantees cost something, usually flexibility and, in most cases, any inheritance for your family. Understanding exactly what you’re giving up matters, because a guaranteed annuity is one of the few financial decisions in retirement that is almost entirely irreversible once made.
Where It Fits Into Your Retirement Decision
South African retirement law requires that at least two-thirds of your retirement interest in a pension fund, pension preservation fund, or retirement annuity be used to buy an annuity, rather than taken as cash. There are a few important exceptions worth knowing about.
- If your total retirement interest is R360,000 or less, you can take the whole amount as a cash lump sum and skip annuitisation entirely
- Under the two-pot retirement system, if your retirement component specifically is below R165,000, that portion can also be taken in cash
- Contributions and growth in a provident fund or provident preservation fund made before 1 March 2021 remain fully cashable under “vested rights,” even above these thresholds, regardless of the two-pot changes
Importantly, you are not required to put your entire compulsory two-thirds into a guaranteed annuity. Many retirees split it between a guaranteed annuity and a living annuity, using the guaranteed portion to cover essential monthly expenses and the living annuity for flexibility and growth potential. This is worth discussing with an adviser rather than defaulting into one or the other.
The Main Types of Guaranteed Annuity
Guaranteed annuities aren’t a single product. The type you choose has a major effect on both your starting income and what happens later.
Level Annuity
This pays the exact same rand amount every month for life. It offers the highest starting income of any guaranteed annuity option, but inflation steadily erodes its buying power. At South Africa’s typical 3% to 6% inflation range, the real value of a level annuity falls by roughly 16% to 30% every six years. It can suit retirees with a shorter life expectancy or other inflation-linked income, but it is a poor sole source of income for someone who may live another 20 to 30 years.
Escalating and Inflation-Linked Annuity
This starts lower than a level annuity but increases every year, either by a fixed percentage you choose upfront (commonly 3% to 6%) or in line with actual inflation (CPI-linked). The inflation-linked version gives the strongest long-term protection of your purchasing power but starts noticeably lower than a fixed escalation of the same percentage, since the insurer has to price in inflation uncertainty.
With-Profit Annuity
A with-profit annuity guarantees a base income for life, with the possibility of annual increases linked to the investment performance of an underlying portfolio, smoothed against a “post-retirement interest rate” the insurer sets at the outset. Once an increase is granted, it’s locked in and can’t be taken away later, but increases aren’t guaranteed every year and depend on how the underlying investments perform. It sits between a level and an inflation-linked annuity in terms of risk and potential income growth.
Enhanced or Impaired Life Annuity
If you have a medical condition or lifestyle factor that is likely to shorten your life expectancy, some insurers will individually underwrite your annuity and pay a higher monthly income, on the basis that they expect to pay it out for fewer years. This requires disclosing your health history to the insurer, similar to applying for life cover.
Life Annuity With Capital Protection (“Capital Back”)
This combines your annuity with a small life insurance policy that pays out a protected capital amount to your nominated beneficiaries if you die. The insurance premium is deducted from your monthly income, but it does not increase as you age, it stays flat for the life of the policy. The real value of the protected capital does erode over time with inflation though: industry analysis shows it loses roughly a quarter of its real value after five years and around three-quarters after ten years, and after about 15 years the cumulative premiums you’ve paid can exceed the real value of the capital being protected. It’s worth understanding this erosion before assuming the “capital back” feature preserves real value for your family long-term.
Guarantee Period (Sometimes Marketed as “Guaranteed for Life”)
This isn’t a separate annuity type so much as an add-on feature available on most of the types above. You select a guarantee period, commonly 10 to 20 years, and if you die within it, your insurer continues paying the income (or a commuted lump sum, depending on the policy) to your nominated beneficiary for the remainder of that period. If you outlive the guarantee period, the feature simply falls away and income continues as normal with no change.
Joint-and-Survivorship (Spouse’s) Annuity
Also an add-on rather than a separate type, this continues paying an income, usually at a reduced percentage such as 50% or 75%, to a named spouse or partner for the rest of their life after you die. Because the insurer is now covering two lives, your starting income is lower than a single-life version of the same annuity.
What You Can, and Can’t, Do After You’ve Bought It
This is the detail most retirees underestimate. A guaranteed annuity is an insurance contract, not an investment account. Once it’s in place:
- You cannot switch insurers, change the annuity type, or convert it into a living annuity later
- You cannot draw additional lump sums or vary your monthly income beyond what the contract specifies
- You cannot add a guarantee period, spouse’s annuity, or capital protection feature after the fact; these must be selected at the point of purchase
Because of this, the only real decisions you get to make happen before you sign. Two are worth prioritising. First, get quotes from several insurers for the same amount and the same features: guaranteed annuity rates can differ meaningfully between providers for identical money, and because this is a once-off, irreversible decision, shopping around matters more here than almost anywhere else in your financial life. Second, decide honestly which features you actually need. Every guarantee period, spousal continuation, or capital protection feature you add reduces your starting monthly income in exchange for that protection, so it’s worth distinguishing between features that address a real risk in your situation and features that simply feel reassuring.
How a Guaranteed Annuity Is Taxed
Income from a guaranteed annuity bought with compulsory retirement fund proceeds is taxed as ordinary income through PAYE, using the normal SARS tax tables that apply to salaries, currently seven brackets running from 18% up to 45%. There is no special, lower annuity tax rate.
Two things work in most retirees’ favour here. Taxpayers 65 and older qualify for an additional secondary rebate, and those 75 and older qualify for a further tertiary rebate, both of which raise the income level below which no tax is payable at all. For the 2026/27 tax year, the tax threshold for someone 65 to 74 sits at roughly R153,250 a year, meaning a guaranteed annuity that is your only income and falls below that level attracts no income tax at all.
If you have other income, other annuities, rental income, part-time consulting, interest, all of it is added together for tax purposes, and your annuity provider will typically apply PAYE based only on the income it pays you, not your full picture. This commonly means pensioners with multiple income sources are under- or over-taxed during the year and need to reconcile the difference through an annual tax return.
One further nuance: if you ever buy a guaranteed annuity voluntarily, with savings that didn’t come from a retirement fund, rather than as the compulsory product at retirement, the tax treatment is more favourable. Only the interest portion of each payment is taxed as income; the portion treated as a return of your own capital is tax-free. This doesn’t apply to the standard, compulsory-purchase guaranteed annuity most retirees buy.
Can You Leave It to a Beneficiary?
By default, no. If you buy a plain guaranteed-for-life annuity with none of the optional features above, the income is personal to you. When you die, the payments simply stop. Nothing passes to your spouse, your children, or your estate.
To provide for anyone after your death, you need to have selected one of the relevant features at the time you bought the annuity:
- A guarantee period continues paying your nominated beneficiary for whatever remains of the chosen term if you die within it
- A joint-and-survivorship annuity continues a reduced income to a named spouse for the rest of their life
- A capital-back annuity pays a protected lump sum to your beneficiaries, subject to the real-value erosion described above
Each of these reduces your own income while you’re alive in exchange for the protection. How a death benefit under any of these features is actually taxed in your beneficiary’s hands, as income, as a retirement fund lump sum, or otherwise, depends on the specific feature and how the insurer has structured the policy, and this is genuinely worth confirming directly with your insurer or financial adviser rather than assuming, since it isn’t a single, uniform rule across all guaranteed annuity products.
Key Takeaways
- A guaranteed annuity trades flexibility and, in most cases, inheritance, for a predictable income you can’t outlive
- You can usually split your compulsory annuitisation between a guaranteed annuity and a living annuity rather than choosing only one
- Once purchased, the type, insurer, and any added features are locked in for life; all the important decisions happen before you sign
- Shop rates across multiple insurers before buying; identical money can produce meaningfully different income offers
- The income is taxed as ordinary income through PAYE, though the 65+ and 75+ rebates mean many pensioners pay little or no tax if the annuity is their main income
- Leaving anything to a beneficiary requires choosing a guarantee period, spouse’s annuity, or capital-back feature upfront; none of this happens automatically
Frequently Asked Questions
What is the difference between a guaranteed annuity and a living annuity?
A guaranteed annuity is an insurance product: the insurer takes on the investment and longevity risk and pays you a fixed or pre-agreed income for life. A living annuity is an investment account you control yourself, from which you choose a drawdown rate within regulated limits, but the income isn’t guaranteed and the capital can run out if investment returns are poor or the drawdown rate is too high.
Can I change my guaranteed annuity type or switch insurers after buying it?
No. A guaranteed annuity is a once-off, irrevocable purchase. The type, insurer, and any features such as a guarantee period or spouse’s annuity must all be decided before you sign, because none of it can be altered afterward.
Can I leave my guaranteed annuity to my spouse or children?
Only if you selected a feature that allows for this at the time of purchase, a guarantee period, a joint-and-survivorship annuity, or a capital-back annuity. Without one of these, the income stops entirely on your death and nothing passes to anyone.
How much tax will I pay on my guaranteed annuity income?
It’s taxed as ordinary income at your marginal rate, using the same tax tables that apply to a salary. The 65+ and 75+ age rebates raise the income level below which no tax is due, so many retirees pay little or nothing if the annuity is their only income, but combined income from multiple sources is taxed together.
Do I have to put all of my retirement savings into a guaranteed annuity?
No. You can typically split the compulsory two-thirds between a guaranteed annuity and a living annuity, and if your total retirement interest is below the de minimis thresholds, you may be able to take some or all of it in cash instead.
Need Help Deciding?
Choosing between annuity types, insurers, and optional features is not a decision to make alone, particularly given how permanent it is. We always recommend speaking to an authorised financial planner before buying a guaranteed annuity, so the choice actually fits your health, your dependants, and your income needs. For the alternative at-retirement option, read our guide to Living Annuities.
This article was researched and drafted with the assistance of AI tools, using the sources credited in the production notes below, and reviewed for accuracy before publication. Tax thresholds, de minimis amounts, and annuity rates change with each Budget and with market conditions; please confirm current figures and get quotes from your insurer or financial adviser before making a decision. This is general information, not personalised financial advice.
