---
title: "How to navigate the financial management choices involving life annuities"
description: "Context — and your age — is important when choosing between an annuity with a level income or one with an increasing income."
type: "NewsArticle"
publisher: "Daily Maverick"
site: "https://www.dailymaverick.co.za"
section: "THE FINANCIAL WELLNESS COACH"
author: "Kenny Meiring"
author_url: "https://www.dailymaverick.co.za/author/kenny-meiring/"
canonical_url: "https://www.dailymaverick.co.za/article/2024-06-23-how-to-navigate-the-financial-management-choices-involving-life-annuities/"
published: "2024-06-23T22:15:26"
updated: "2024-06-23T22:15:29"
lang: "en-ZA"
word_count: 470
---

# How to navigate the financial management choices involving life annuities

> Context — and your age — is important when choosing between an annuity with a level income or one with an increasing income.

By Kenny Meiring · Published 24 June 2024, 00:15 SAST · Updated 24 June 2024, 00:15 SAST

## Key points
- Deciding between a life annuity with a higher initial payout and no premium escalation versus one with a lower initial payout but annual escalation is like choosing between a flashy sports car that starts strong but fizzles out, or a steady sedan that gains momentum over time - context is key, so make sure your financial vehicle suits your retirement journey.
- There are pros and cons to choosing between a life annuity with a higher initial payout and no premium escalation versus a lower initial payout with an annual increase.
- A life annuity guarantees a steady income for life, regardless of market fluctuations or longevity.
- Analysis shows that while a level annuity initially provides higher income, an increasing annuity becomes more beneficial after a certain age.
- Context is key in choosing the right annuity type, with factors like existing investments affecting the decision.

## Content

**Question:** Is it better to take a life annuity with a higher initial payout, but no escalation in the premium, or to take a life annuity with a lower initial payout but with an annual escalation?

**Answer:**A life annuity is a series of payments that you can buy from a life insurance company. These payments will be made for the rest of your life.

A life annuity can play a useful role in managing your finances as you are guaranteed a certain level of income for the rest of your life – regardless of what happens to the stock markets or how long you live.

You can elect to receive a level income for the rest of your life, or you can have the income rise by a set percentage each year.

With a level annuity, the starting value is much higher than an annuity that increases each year. At some stage there will be a breakthrough where the annuity that increases each year will be larger than the level one.

Here is an example of a 65-year-old investing R2-million into a life annuity:

![Image](https://www.dailymaverick.co.za/wp-content/uploads/2024/06/Screenshot-2024-06-23-at-17.25.20.png)

By the age of 71, the income from the increasing annuity will be greater than that of the level annuity.

So, from the age of 71, it makes more sense to have an increasing annuity.

![Image](https://www.dailymaverick.co.za/wp-content/uploads/2024/06/Screenshot-2024-06-23-at-17.25.30.png)

However, up to the age of 71, the level annuity provided a much higher income than the increasing one. If we added up all the payments received by the age of 71, we would have:

![Image](https://www.dailymaverick.co.za/wp-content/uploads/2024/06/Screenshot-2024-06-23-at-17.25.43.png)

However, by the age of 76, the increasing annuity would have resulted in a greater amount of income.

![Image](https://www.dailymaverick.co.za/wp-content/uploads/2024/06/Screenshot-2024-06-23-at-17.25.54.png)

On the surface, the increasing annuity looks like the better option; however, context is important. I sometimes use a level annuity if a client has other investments. The initial higher income from the level annuity allows me to invest the other funds in structures that may be more volatile but have a higher growth potential than a typical portfolio that is used for an income.

This can produce a better overall result for the client.

On the other hand, if this is the sum total of your retirement savings, then it would be irresponsible to choose a level one as you will encounter financial challenges in the future as your income is not growing while your expenses are increasing because of inflation. **DM**

*Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to kenny.meiring@sfpadvice.co.za.*

*This story first appeared in our weekly**Daily Maverick**168**newspaper, which is available countrywide for R35.*

*You may write a letter to the DM168 editor at [heather@dailymaverick.co.za](mailto:heather@dailylmaverick.co.za) sharing your views on this story. Letters will be curated, edited and considered for publication in our weekly newspaper on our readers' views page.*

![Image](https://www.dailymaverick.co.za/wp-content/uploads/2024/06/DM-22062024001jhbis.jpg)