What Is a Living Annuity?
A Living Annuity is a retirement product that lets you draw an income while your money stays invested. You choose how your money is invested and how much income you take each year.
Here’s how it works.
In South Africa, you can withdraw between 2.5% and 17.5% of your investment each year. The rest stays invested and can continue to grow.
Where Does a Living Annuity Come From?
A Living Annuity is usually bought using retirement savings from a pension fund, provident fund, preservation fund, or retirement annuity. When you retire, you generally need to use at least two-thirds of your savings to buy an annuity. This is where a Living Annuity becomes important.
This means choosing a Living Annuity is not a separate decision. It is part of your overall retirement plan.
Why Most People Choose a Living Annuity
A Living Annuity gives you:
- Flexible income
- Control over your investments
- The ability to adjust your drawdown each year
- The option to leave money to beneficiaries
These are strong benefits, but they are not the only things that matter.
The Most Important Factor: EAC
If you are comparing a Living Annuity, the most important number to understand is EAC.
EAC stands for Effective Annual Cost. It shows the total yearly cost of your investment.
It includes:
- Administration fees
- Investment management fees
- Adviser fees
- Other product costs
A lower EAC means more of your money stays invested. A higher EAC means more of your return is lost to fees.
Why Fees Matter More Than You Think
Fees may look small, but they reduce your returns every year. Over time, this makes a big difference.
For example:
- If your investment grows at 8% and fees are 1%, your net return is 7%
- If fees are 3%, your net return drops to 5%
That difference compounds over time and can reduce your income later in retirement.
The Simple Rule for a Sustainable Living Annuity
Your Living Annuity needs to balance three things:
- Your withdrawals
- Your fees
- Inflation
These must all be supported by your investment return. If not, your money may run out too soon.
Can You Change Your Living Annuity?
Yes, you can transfer your Living Annuity to another provider.
This allows you to:
- Reduce fees
- Improve your investment options
- Simplify your structure
The transfer is usually tax-free as long as the money stays within a Living Annuity. Before switching, check for any fees or delays.
Living Annuity vs Life (Guaranteed) Annuity
A Living Annuity gives you flexibility. Your income can change, and your money stays invested. A life (guaranteed) annuity is different. It pays you a fixed income for life, no matter how long you live.
Key differences:
- Living Annuity: Flexible income, market risk, money can be left to beneficiaries
- Life Annuity: Fixed income, no investment risk, usually no capital left behind
A Living Annuity offers more control, but also more responsibility. A life annuity offers certainty, but less flexibility.
Why Beneficiaries Matter
One key benefit of a Living Annuity is that you can leave any remaining money to your beneficiaries.
This can form part of your estate planning and help support your family. However, high fees can reduce the amount that is left behind.
Use a Living Annuity Calculator
A Living Annuity calculator helps you:
- Estimate your monthly income
- Test different withdrawal rates
- See how long your money may last
Some calculators also show how fees affect your investment. This helps you make better decisions before committing.
What Makes a Good Living Annuity
A good Living Annuity should offer:
- Low and transparent fees (low EAC)
- Simple investment options
- Flexible income
- Clear information
- Helpful planning tools
The goal is not just growth. The goal is sustainable income.
Questions to Ask Before You Choose
Before choosing a Living Annuity, ask:
- What is the total EAC?
- Are there adviser or hidden fees?
- How flexible is the income?
- Can I adjust my investments easily?
- What happens to my money when I pass away?
Clear answers to these questions help you avoid costly mistakes.
Final Takeaway
The best Living Annuity is not the one with the highest return. It is the one that helps you keep more of your money.
Focus on:
- Fees
- Returns
- EAC
- Sustainable withdrawals
- Long-term outcomes
Small cost differences can have a big impact over time. Keep it simple, understand your costs, and choose a Living Annuity that supports your retirement for the long term.
Use our Living Annuity Calculator to estimate your income, test different withdrawal rates, and see how long your savings could last. You can also explore our Living Annuity Product, or read our Living Annuity Insights and Living Annuity FAQs for deeper guidance and informed retirement planning.
