As South Africans approach retirement, one of the most important decisions is how to convert retirement savings into a sustainable income. One of the most common options is a Living Annuity.
Here’s how it works.
A Living Annuity is purchased using retirement savings when you retire, usually from a Pension fund, Provident fund, Preservation Fund or Retirement Annuity. A portion may be taken as a lump sum, with the balance used to provide retirement income through the living annuity.
It offers flexibility and control, but the long-term outcome depends on how it is structured. The drawdown rate, investment performance and total fees all play an important role in how much income you can draw and how long the capital may last.
What is a Living Annuity?
A Living Annuity is a retirement income product that allows you to draw an income from your invested capital after retirement.
You select an annual income between 2.5% and 17.5% of your investment value, while the remaining capital stays invested across a range of portfolios, including local and offshore investments. Your income is not guaranteed and depends on investment performance, your drawdown rate and the total fees charged.
How Does a Living Annuity Work?
At retirement, your accumulated savings are used to purchase a Living Annuity.
You then:
- Choose an income level (drawdown rate)
- Select an investment strategy
- Receive a regular income while your capital remains invested
Your income can be reviewed and adjusted annually.
What Drawdown Rate is Sustainable?
The drawdown rate is one of the most important decisions.
As a general guide:
- 4% to 6% per year is typically more sustainable
- Above 6% increases the risk of running out of capital
- Lower drawdowns help preserve capital over time
The correct rate depends on your age, returns and financial needs.
What are the Benefits of a Living Annuity?
A Living Annuity offers flexibility, allowing you to adjust your income as your needs change.
Your capital remains invested, giving you the potential for long-term growth that can help offset inflation. You also retain control over your investments, and any remaining capital can be passed on to beneficiaries.
What Happens to a Living Annuity on Death?
Any remaining capital in a Living Annuity can be paid to your nominated beneficiaries. Depending on the options available, they may be able to take the benefit as a lump sum, continue the investment in a Living Annuity, or use another annuity option.
This is one of the key estate planning benefits of a Living Annuity, as the remaining capital does not fall away on death.
What are the Risks of a Living Annuity?
The main risk is that your capital may not last for life.
If withdrawals are too high or returns are poor, your investment may reduce too quickly. There is also market risk, as the value of your investment fluctuates over time. Unlike guaranteed annuities, there is no fixed income for life.
Why Fees (EAC) Matter in a Living Annuity
One of the most important factors to understand is your Effective Annual Cost (EAC), which reflects the total fees across administration, advice and portfolio management.
Fees and returns must be considered together.
For example:
- 2% fees on R10 million = R200,000 per year
- 1% fees on R10 million = R100,000 per year
A 1% difference equals R100,000 per year, which compounds over time and directly impacts your income.
In many cases, total fees are 2% or more, whereas ideally they should be closer to 1% or less.
When is a Living Annuity Suitable?
A Living Annuity may be suitable if you:
- Want flexibility over your income
- Are comfortable with investment risk
- Want to keep your capital invested
- Have sufficient assets to manage drawdown risk
In Summary
A Living Annuity offers flexibility and control, but the outcome depends on how it is structured.
Your drawdown rate, investment strategy and total fees all play a role in determining whether your income will be sustainable over time. Even small differences in fees and withdrawals can have a meaningful impact on your long-term retirement outcome.
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.
7 Popular Living Annuities FAQs
1. What is a Living Annuity in simple terms?
A living annuity is a retirement product that allows you to draw an income from your invested savings while keeping the balance invested.
2. What is a safe drawdown rate for a Living Annuity?
A drawdown of around 4% to 6% per year is generally considered more sustainable, depending on returns and lifespan.
3. What fees do you pay on a Living Annuity?
Fees include administration, advice and investment management fees, collectively shown as the Effective Annual Cost (EAC).
4. What is a good EAC for a Living Annuity?
A total fee of around 1% or less is generally considered efficient, while many investors pay 2% or more.
5. Can you run out of money in a Living Annuity?
Yes. If withdrawals are too high or returns are poor, the capital can be depleted over time.
6. Where does the capital come from?
A Living Annuity is funded using retirement savings at retirement, typically from a Pension, Provident, Preservation Fund or Retirement Annuity.
7. What happens to your money when you pass away?
Any remaining capital passes to your nominated beneficiaries, who can either take a lump sum or continue the annuity.
