A Living Annuity can either fund your retirement for life or run out years too early. The difference comes down to a few critical decisions: how much you withdraw, how your money is invested, and how much you pay in fees.
The trade-off is:
Unlike guaranteed products, a Living Annuity gives you full control. But that control comes with responsibility. Understanding how a Living Annuity works is the key to making it sustainable.
A Living Annuity is a market-linked retirement product that provides a flexible income from your invested retirement savings, without guaranteeing income for life.
Quick Answer: How a Living Annuity Works
- You invest your retirement savings into a Living Annuity
- You withdraw an income each year (between 2.5% and 17.5%)
- Your money stays invested in the market
- Your income depends on returns, fees, and how much you withdraw
- You can adjust your income and investments annually
A Living Annuity does not guarantee income; it relies on your capital lasting.
Key Facts About a Living Annuity
- Income range: 2.5% to 17.5% per year
- Sustainable drawdown: typically around 4% to 5%
- Investment: market-linked (not guaranteed)
- Risk: you carry both investment and longevity risk
- Inheritance: remaining capital goes to beneficiaries
What is a Living Annuity?
A Living Annuity allows you to draw an income from your retirement savings while keeping your capital invested.
Key features:
- You choose your annual income within regulatory limits
- Your capital remains invested in financial markets
- Your income is not guaranteed
- Any remaining capital can be passed on to beneficiaries
This structure shifts responsibility from an insurer to you. Your outcome depends on how well you manage it.
How a Living Annuity Works
A Living Annuity follows a simple structure, but small decisions have long-term consequences.
- You transfer your retirement savings into a Living Annuity
- You choose a drawdown rate between 2.5% and 17.5%
- Your remaining capital stays invested
- You receive income monthly, quarterly, or annually
- You review and adjust your plan each year
The key principle: Withdrawals, fees, and returns must stay in balance for your capital to last.
A simple way to think about it:
- Drawdown rate + fees + inflation < investment returns
If this balance is maintained, your capital is more likely to last.
The Three Factors That Determine Your Living Annuity Outcome
The success of a Living Annuity is driven by three variables.
1. Your Drawdown Rate
- Legal range: 2.5% to 17.5%
- Sustainable range: typically around 4% to 5%
- Higher withdrawals increase the risk of running out of money
Most failures happen when withdrawals are too high, especially early in retirement.
2. Your Investment Strategy
- Equities help your income keep up with inflation
- Bonds and cash reduce short-term volatility
- Offshore exposure improves diversification
A portfolio that is too conservative may not grow enough to sustain long-term income.
3. Fees and EAC (Effective Annual Cost)
Fees in a Living Annuity compound against you every year, reducing the income your future self depends on.
- Some products charge 2% or more annually
- Lower-cost options may be under 1%
- Even a 1% difference can significantly reduce long-term income
Understanding your EAC is critical when choosing and managing a Living Annuity.
What Is Sequence of Returns Risk in a Living Annuity?
Sequence of returns risk is one of the most important risks in a Living Annuity.
- Poor returns early in retirement can permanently damage your portfolio
- Withdrawals during downturns lock in losses
- Later recoveries may not fully restore your capital
In a Living Annuity, timing matters more than averages. Early losses combined with withdrawals can significantly reduce future income.
Example: How a Living Annuity Can Fail
- You retire with R5 million in a Living Annuity
- You withdraw 8% per year
- The market declines early in retirement
What happens:
- Withdrawals continue while your portfolio falls
- Your capital reduces faster than expected
- Recovery becomes difficult even when markets improve
Result: your Living Annuity may run out years earlier than planned.
How Fees and EAC Impact Your Living Annuity Over Time
- Higher fees reduce the amount of money that stays invested
- Lower growth leads to lower sustainable income
- The impact compounds over decades
For example:
- A Living Annuity with 1% fees retains more capital
- A Living Annuity with 2.5% fees loses significantly more each year
Keeping EAC low is one of the most effective ways to improve outcomes.
A Simple Living Annuity Strategy Framework
- Keep your drawdown rate conservative (around 4%–5%)
- Minimise fees and understand your EAC
- Maintain exposure to growth assets
- Diversify across local and offshore investments
- Review regularly, but avoid emotional decisions
A disciplined approach gives your strategy the best chance of lasting.
Tax Benefits of a Living Annuity
- Investment growth is tax-sheltered
- You only pay income tax when withdrawing income
- More of your capital remains invested over time
This makes a Living Annuity an efficient structure for retirement income.
Advantages of a Living Annuity
- Flexible income that can be adjusted annually
- Control over investment decisions
- Potential for long-term growth
- Ability to leave remaining capital to beneficiaries
Disadvantages of a Living Annuity
- No guaranteed income for life
- Exposure to market volatility
- Risk of running out of capital
- Requires ongoing management
Common Living Annuity Mistakes
- Withdrawing too much too early
- Ignoring fees and EAC
- Being too conservative with investments
- Reacting emotionally to market movements
The biggest risk is not the market, it is poor decision-making.
Living Annuity vs Guaranteed Annuity
- A Living Annuity offers flexibility, but you carry the risk
- A guaranteed annuity offers certainty, but limited flexibility
- A Living Annuity allows growth and inheritance
- A guaranteed annuity typically does not
Can You Blend a Living Annuity and a Guaranteed Annuity?
In short, yes:
- Combine a Guaranteed Annuity for secure lifelong income
- Use a Living Annuity for flexibility, growth, and inheritance
- Balances certainty and control
Table comparison (below) of a Guaranteed (Life) Annuity versus Living Annuity
Who Should Consider a Living Annuity?
- Investors who want flexible income
- Those comfortable with market risk
- Individuals who understand drawdown discipline
- Those who want to leave a financial legacy
What Happens to a Living Annuity When You Die?
- The remaining value in a Living Annuity does not form part of your estate
- It is paid directly to your nominated beneficiaries
- Beneficiaries can:
- take a lump sum (tax applies)
- continue with a Living Annuity
- choose a combination
This makes a Living Annuity not just an income product, but also a powerful estate planning tool.
Can You Move a Living Annuity If You Emigrate?
- A Living Annuity cannot be transferred to another country or offshore provider
- Your investment remains with a South African provider
- You can continue receiving income wherever you live
- Payments can be made to local or offshore bank accounts (depending on provider processes)
A Living Annuity is portable in terms of income, but not transferable as a product.
Where a Living Annuity Comes From
A Living Annuity is usually funded at retirement using money from:
- Employer Fund, like a Pension or Provident Fund
- Pension Preservation Fund
- Provident Preservation Fund
- Retirement Annuity
Can You Transfer One Living Annuity to Another?
Yes, you can transfer an existing Living Annuity to another Living Annuity provider if you want to switch.
Use a Living Annuity Calculator
A Living Annuity calculator can help you estimate how long your money may last based on your drawdown rate, fees, and investment returns.
- Test different withdrawal rates
- See how fees affect long-term income
- Understand how long your capital may last
Using a calculator makes it easier to turn a Living Annuity strategy into a practical plan.
Final Thoughts on a Living Annuity
The success of a Living Annuity is not determined by the product itself, but by how it is managed over time.
To improve your outcome:
- Keep withdrawals sustainable
- Stay invested for long-term growth
- Minimise fees and understand your EAC
A Living Annuity gives you control, but it also requires discipline to make your money last.
Top 3 FAQs about a Living Annuity
1. What is a safe drawdown rate for a Living Annuity?
Around 4%–5% is generally considered sustainable.
2. Can a Living Annuity run out of money?
Yes, if withdrawals are too high or returns are too low.
3. Is a Living Annuity better than a guaranteed annuity?
It depends on whether you prioritise flexibility or certainty.
Explore our Living Annuity Product or use our Living Annuity Calculator to see how your retirement income could work in practice. You can also read our Living Annuity Insights and Living Annuity FAQs for more guidance.
