Category: News Flash | Financial Risks Guaranteed Life Inflation Inflation VS Purchasing Power Living Retirement Annuity
WHY INFLATION MATTERS
Inflation is a reality we all live with – from the groceries we buy to the fuel in our tanks and the medical aid bills that arrive each year without fail. It’s a slow, constant increase in prices that may not feel urgent day to day – but over the course of your retirement, it can have a serious impact on your ability to maintain your lifestyle and meet your basic needs.
The two biggest financial risks in retirement are:
- Running out of money too soon
- Losing the buying power of your money over time
Your retirement plan isn’t just about what you can afford today – it’s about how long your money will last and how far it will stretch in 10, 20, or even 30 years. Finding the balance between income today and protection against inflation tomorrow is essential to long-term stability.
UNDERSTANDING YOUR ANNUITY OPTIONS
When you retire from your pension, provident, retirement annuity, or preservation fund, you’ll typically need to choose between two broad types of income products:
- Guaranteed Life Annuity
- Living Annuity
Let’s explore how each of these responds to inflation – and what you should consider before making a decision.
GUARANTEED LIFE ANNUITY OPTIONS
A guaranteed life annuity provides a fixed, predictable income for life. Once chosen, the terms of this annuity cannot be altered. This can offer peace of mind – but it also means you need to think carefully about inflation protection upfront.
1. INFLATION-LINKED ANNUITY
- Aligns your annual increases directly to inflation.
- Offers the strongest inflation protection meaning you won’t fall behind in real terms.
- However, the trade-off is a lower starting income, as the cost of this protection is priced in from the start.
2. FIXED INCREASE ANNUITY
- You choose a set increase (e.g., 5%) that applies each year.
- Your initial pension is higher than with an inflation-linked annuity.
- But if inflation exceeds the fixed rate (as it often does), your buying power erodes over time.
3. LEVEL ANNUITY
- Offers the highest starting pension.
- No increases at all – your income stays flat every year.
- While it may look attractive initially, its purchasing power drops significantly within just a few years.
4. WITH-PROFIT ANNUITY
- Annual increases are linked to the returns of a specific investment portfolio.
- Targets inflation protection but does not guarantee it.
- If markets underperform, your income may lag behind inflation.
KINDLY NOTE: Once selected, a guaranteed life annuity is locked in permanently. Choose with care and plan ahead for inflation.
LIVING ANNUITY AND FLEXIBLE INCOME DRAWING
A living annuity gives you more flexibility – but also places greater responsibility on you or your advisor to manage inflation risk.
You can draw an income between 2.5% and 17.5% of your capital per year, with the option to revise this annually. However, increasing your income too aggressively to match inflation can have long-term consequences.
HOW INFLATION ERODES PURCHASING POWER
Here’s a simple visual to demonstrate the effect of inflation over time:
| Year | Annual Income (No Increase) | Buying Power if Inflation = 6% |
|---|---|---|
| 0 | R100,000 | R100,000 |
| 5 | R100,000 | R74,700 |
| 10 | R100,000 | R55,800 |
| 20 | R100,000 | R31,100 |
QUESTIONS TO ASK YOURSELF
- What inflation rate am I planning for?
- Is my income strategy flexible enough to adapt to updates?
- Can I afford an inflation-linked annuity, or should I consider a mix?
- Am I prepared for rising medical aid costs?
CONCLUSION: STAYING AHEAD OF INFLATION
You only get one retirement. Inflation doesn’t stop, and neither should your planning.
Whether you choose a guaranteed annuity or a living annuity, build in protection now so that you’re not caught off guard in later years. A lower starting income could be a small price to pay for long-term peace of mind.
Speak to your advisor or contact us at Tax A Sured to begin building a retirement plan that will serve you for decades.
DISCLAIMER
Nothing in this article and/or post should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure accuracy, Tax A Sured (Pty) Ltd does not accept any responsibility for consequences of decisions taken based on this article and/or post. It remains your own responsibility to consult the relevant primary resources when taking a decision.
