Riding the market wave: Why it's a good time to consider with-profit annuities
Thanks to robust market performance, the JSE is at record levels and balanced funds have delivered double-digit returns over the past year.
With-profit life annuities benefit from this in two ways: strong prospects for good increases from 2026 onwards, and more available funds to secure a higher guaranteed income for retirement, making it a compelling time to consider a with-profit annuity.
In recent years, retirees have gravitated toward fixed escalating life annuity options, especially those guaranteeing annual increases of around 5%. The appeal of these products lies in their simplicity and predictability as retirees know exactly how much their income will grow each year. The downside, however, is that fixed annual increases may not be sufficient if inflation rises unexpectedly.
With-profit annuities were popular before 2023, but their appeal has declined recently due to modest annual increases driven by subdued smoothed returns from balanced funds.
However, the landscape for with-profit annuities is shifting.
A with-profit annuity is invested in a diversified portfolio of bonds and a balanced fund and is therefore expected to outperform a fixed escalating income product in the longer term, which is invested only in bonds. And right now, with-profit annuities offer the benefit of locking in recent good market returns with two valuable safeguards:
• Annual increases are based on six-year smoothed returns that offer protection against volatile future returns.
• Increases can never be below zero.
The graph below shows the robust returns posted by balanced funds since the start of this year:
Source: Just SA
As a result, increases projected for 2026 on some with-profit annuity options may be more than similarly priced fixed escalating counterparts. This marks a notable improvement and signals a return to competitiveness for with-profit annuities, making them a compelling choice once again for those seeking lifetime income solutions with higher expected income growth over the long term.
A further benefit of good balanced fund performance is that the effective guaranteed income clients can secure has increased materially, even though annuity rates have come off their recent highs experienced around April 2025.
This can be seen in the graph below, which tracks the following since January 2025:
• The grey line is the market value of a balanced portfolio.
• The coral line is the JuLI annuity rate.
• The green line is the level of guaranteed lifetime income that a client can purchase.
The market value of the balanced portfolio is applied to a Just annuity rate to calculate the starting income that can be bought.
Source: Just SA
It is important to recognise the risks involved in delaying annuitisation in hopes of higher yields. While it may seem appealing to wait for yields to spike again to secure a higher starting income from annuities, this approach is typically tied to adverse market conditions. Historically, significant increases in yields are often the result of a market crash. Such events can substantially reduce the value of the funds available for investment, ultimately offsetting any potential gains from higher annuity rates.
For both advisers and retirees, it is an opportune time to reap the benefits of good market performance and consider securing a with-profit annuity, either as a standalone life annuity or as a blend in a living annuity. The current environment offers the potential for a robust starting income, along with the possibility of benefiting from recent and future market performance. With-profit annuities ensure a degree of financial stability for retirees, a safety net of income that cannot decrease, while still allowing for the prospect of investment-linked income growth.
