Choosing a living annuity

At retirement, you have the option to transfer your retirement fund savings into an investment vehicle called a living annuity. The purpose of this vehicle is to provide you with regular income through-out your retirement.

The living annuity is more flexible than a Guaranteed Annuity as it allows you to choose the assets you want to hold, and the income you wish to draw every year. Also, your capital does not die with you – your nominated beneficiaries inherit any residual value after your death. They can choose to receive this as a lump sum or as an annuity.

However, with this flexibility comes greater risk and responsibility as the onus is now on you to secure an adequate income for life. If you make poor decisions, you may very well outlive your savings.

Over and above your draw-down rate, the two critical things you must consider when choosing a living annuity are your portfolio’s investment mix and the fees you pay. Get these two decisions right and your retirement savings will sustain you years, if not decades, longer.

Legislated restrictions

Even with a living annuity, you are still subject to some statutory restrictions. You must draw a pension from your investment. This so-called draw-down must be at least 2.5% but no more than 17.5% pa of the value of your residual capital. This limits how much money you can draw down annually.

Assuming you draw a fixed amount every year (possibly growing with inflation), you run the risk that your desired income will eventually exceed the permitted maximum rate of 17.5% pa. You draw-down will then be capped and you will have get by on less income. As your standard of living will drop, we refer to this as the risk of a life-style change.

But the essential purpose of saving, both in the build-up and the draw-down phase is to preserve your accustomed standard of living in retirement. At every phase of this process, your choices should therefore minimise the risk of this happening.

Three key factors determine your sustainable income

You need to consider three primary factors when managing your living annuity savings:

  1. your drawdown rate
  2. the fees you pay
  3. your asset mix (shares, bonds and cash)

These factors are related and you should therefore consider them simultaneously.

Firstly, you must appreciate that your capital is reduced both by your draw-down and by fees. To assess the full impact on your capital, you must add your fee rate to your draw-down rate (both are expressed as a percentage of your capital). The higher your fees, the lower your draw-down rate will need to be, to sustain a given level of income.

Government estimates the industry average fee for living annuity investors at approximately 2.5% (plus VAT) of the investment balance, made up of 0.75% for advice, 0.25% for administration and 1.5% for investment management. But 2.5% in fees represents 50% of a 5% drawdown rate ie. total LA fees can equal half your retirement income.

You can avoid such high charges with 10X. The 10X Living Annuity does not charge for advice or administration and investors pay a maximum fee of 0.87% (including VAT), which reduces for amounts above R5m.

Secondly you mix of assets (essentially equities, bond and cash) will determine the likely long term return your fund will earn on your portfolio, but also the volatility of these returns. If you invest your savings mostly in low risk assets (bonds and cash), the returns are likely to be quite predictable, but also quite low over time. To offset this, you will have to reduce your total withdrawal from the fund (drawdown and fees).

Alternatively, if you invest most of your savings in high risk assets (equities), your average long-term return should be significantly higher, but at the cost of greater variability in the short-term.

How do the factors impact?
The tables below illustrate the relationship between the three primary factors discussed above and the risk of a lifestyle change. Note that the number shown in the tables are all derived from the 10X Retirement Calculator.

Drawdown rate and asset mix: In Fig 1, we show the number of years you can draw a sustainable income, depending on your choice of draw-down rate and asset mix. The output is based on historically average market returns (dating back to 1900). These projections factor in fees, based on the 10X LA maximum fee of 0,86% (incl. VAT), and return volatility.

Fig 1: Years of sustainable income for different draw-down rates and portfolios (10X LA fees)

Low Equity Medium Equity High Equity
4% 29 51 70
5% 19 31 49
6% 14 18 26
7% 11 13 15
8% 9 10 11
9% 7 8 9
10% 5 6

The matrix above highlights that a high equity portfolio will sustain your income much longer than the other two portfolios. Alternatively, you can draw down at a higher rate for an equivalent number of years’ income.

Draw-down rate and fees: In Fig 2 below, we show how fees impact your sustainable income, flexing the draw-down rate and asset mix. The results are based the fee difference between the 10X LA fee, using the maximum of 0,86% pa (incl. VAT), and National Treasury’s estimate of the industry-average fee, 2,85% pa (incl. VAT).

At high draw-down rates, the fee impact is quite muted, as your savings deplete so quickly; however, for those intending to make their savings last, and drawing down conservatively, the fee impact is highly significant. So drawing down at 4% from a high equity portfolio can give you over 30 more years of sustainable income, if you pay the lower fees.

Fig 2: Added years income due to lower fees (10X fee versus industry average fee)

Added Years Low Equity Medium Equity High Equity
4% 10 24 33
5% 5 13 24
6% 3 5 11
7% 2 3 4
8% 2 2 2
9% 1 2 2
10% 0 1

Draw-down rate, asset mix and fees: Our research shows that investors drawing down conservatively (ie between 4% and 6% pa) are best served with a high equity portfolio charging low fees. However the conventional thinking is quite the opposite: the majority of living annuity investors own a medium equity portfolio at best and pay high fees. This compounds the risk of a lifestyle change. In Fig 3 below, we compare the 10X high equity/low fee LA to the industry-average medium equity/high fee product. An investor drawing down at 5% pa should sustain this income 31 year longer choosing 10X’s high equity/low fee option.

Fig 3: Added years of income: High Equity (0,86% fee) versus Medium Equity (2,85% fee)

Other considerations

As a subsidiary consideration. you also need to decide whether you want to rely on indexing or active management. Active managers strive to beat the market index, whereas index managers merely replicate the market index. Although active mangers can potentially earn a higher return, in practice very few do; and the longer the investment term, the lower the probability. Over twenty years, only 1 in 20 fund managers have managed to beat the market index, after fees. The 10X Living Annuity therefore relies exclusively on indexing.

You also need to asses your service provider: how easy is it to access information, how strong are the planning tools, how transparent is the reporting? You will need to review your income level regularly and possibly your investment choice from time to time; you therefore need easy access to your fund value and tools to quantify the potential consequences of your decisions.

Finally, before you enter into a living annuity contract, be sure you are clear on the cost structures (amount and potential escalations), service levels (response time to instructions) and the available investment choices (and the platform provider’s right to change these).


The data used in the projections are the historic real returns observed in the South African and international markets since 1900. A real return is the return earned after inflation has been stripped out. The low, medium and high risk portfolios are constructed as follows:

Fig 4: Asset mix for different portfolios

Low Equity Medium Equity High Equity
SA Cash 75% 50% 25%
SA Equity 12.5% 25% 50%
International Equity 12.5% 25% 25

Your desired income level is assumed to start at the desired draw-down rate. This will give the cash value of your desired income. Each year this cash value increases by the inflation rate to give you an updated desired income level. The probability of a change in lifestyle is therefore the probability of not being able to withdraw this updated desired income level.

The tables in this document estimate the likely impact that your choice of draw-down rate, fees and asset mix will have on your income in retirement. However the results are not guaranteed and this document does not constitute financial advice.

For more information, please visit our Living Annuity Overview page and make use of our retirement planning tools.

Steven Nathan
Founder, Chief Executive (BCom, BAcc, CA (SA), CFA)

As the former Managing Director of Deutsche Bank in Johannesburg and London, Steven spent more than 10 years in equity research and corporate finance. He was consistently the top-rated Banks and Life Insurance analyst in South Africa, and was also voted best overall analyst in SA and EMEA (Emerging Europe, Middle East and Africa). During his time as Head of Research, the Deutsche Bank team was consistently rated no.1.

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