A living annuity is one of the most flexible … and misunderstood … retirement income options available to South Africans.
It allows retirees to keep their capital invested and draw an income of their choosing, rather than locking into a guaranteed income for life. Used well, a living annuity can provide flexibility, long-term growth, and estate-planning benefits. Used poorly, it can place retirees at real risk of running out of money later in life.
This guide explains what a living annuity is, how it works, how it compares to a life annuity, and the key risks retirees often underestimate. More importantly, it explores how to think about drawdowns, investment strategy, and what really determines the best living annuity for your circumstances.
In simple terms:
A living annuity is a retirement income product that allows you to keep your capital invested while drawing an income of your choosing. Unlike a life annuity, the income is not guaranteed, and the sustainability of a living annuity depends on investment returns, drawdown levels, fees, and how long you live.
A living annuity is a retirement income product that allows you to keep your retirement capital invested while drawing an income from it each year.
Instead of exchanging your capital for a guaranteed income (as with a life annuity), a living annuity gives you:
In simple terms, your money stays invested, and you live off it. Living annuities are typically used:
That flexibility, however, comes with responsibility — and risk.
Industry guidance from bodies such as ASISA highlights the importance of sustainable drawdowns and diversified portfolios when using living annuities.
Once your retirement capital is transferred into a living annuity, several key decisions follow.
Your capital is invested in a portfolio, usually made up of unit trusts, ETFs, or model portfolios. The performance of these investments directly affects your future income.
Each year, you choose how much income to draw:
Income can usually be paid monthly, quarterly, or annually.
Income is not guaranteed. It depends on:
If returns are poor or withdrawals are too high, your capital — and future income — can decline significantly.
Any remaining capital in a living annuity can be left to beneficiaries, making it attractive from an estate-planning perspective.
One of the most important retirement decisions is how your income will be generated.
| Feature | Living Annuity | Life Annuity |
|---|---|---|
| Income certainty | Variable | Guaranteed |
| Investment risk | Retiree | Insurer |
| Longevity risk | Retiree | Insurer |
| Flexibility | High | Low |
| Estate benefits | Yes | Limited |
In practice, many retirees benefit from a blend — using a life annuity to cover essential expenses and a living annuity for flexible or discretionary income.
Living annuities can work extremely well — but only when risks are properly understood.
| Risk | Why it matters |
|---|---|
| Sequence of returns risk | Poor returns early can permanently damage outcomes |
| Over-drawing early | High initial income may be unsustainable |
| Inflation | Gradually erodes purchasing power |
| Longevity | Retirements often last longer than expected |
| Emotional decisions | Volatility can trigger poor timing decisions |
Although all three investors earn the same long-term return, the investor who experiences poor returns early on suffers permanent capital damage. When combined with income withdrawals, this risk can materially reduce the sustainability of a living annuity — even if markets recover later.
One of the more concerning trends we’re increasingly seeing in living annuities — particularly among DIY investors — is excessive concentration in a small number of popular equity indices.
The rise of low-cost index funds has been hugely beneficial for investors. However, many living annuity portfolios are now heavily concentrated in indices such as the S&P 500, Nasdaq, or MSCI World — often without fully appreciating how narrow the underlying drivers of return have become.
While these indices appear diversified, returns over the past decade have been dominated by a very small group of (mostly) large technology companies. In practice, different indices often end up owning many of the same top 10 holdings, which means portfolios that look diversified on paper can behave very similarly during market stress.
Over the last 15 years, investors have become accustomed to:
History shows that this is not always the case.
During periods such as the Dotcom crash and the Global Financial Crisis, equity markets experienced drawdowns of 50% or more, followed by long and uneven recoveries. For retirees drawing an income at the same time, these environments can be extremely damaging — particularly when portfolios are highly concentrated and withdrawals are ongoing.
The danger is not just volatility — it’s volatility combined with income withdrawals and insufficient diversification.
| Scenario | Accumulation phase | Retirement (living annuity) |
|---|---|---|
| 50% market drawdown | Uncomfortable, but time allows recovery | Can permanently impair outcomes |
| Income withdrawals | No | Yes |
| Ability to wait for recovery | High | Limited |
| Portfolio concentration | Risky | Potentially catastrophic |
| Mistakes reversible | Often | Rarely |
This is not an argument against index investing.
The risk arises when:
In a prolonged bear market, this combination can lead to:
For retirees using living annuities, the challenge is not avoiding market risk altogether — it’s avoiding the wrong kind of risk at the wrong time.
This is why living annuity portfolios require a fundamentally different mindset to accumulation portfolios, and why diversification, risk management, and drawdown planning become far more important than simply holding the lowest-cost or best-performing index of the last decade.
Many people search for the “best living annuity in South Africa” expecting a list of products or providers. In reality, a living annuity is not an investment — it is a structure.
The outcome depends on:
Two retirees using the same living annuity platform can experience vastly different outcomes.
The best living annuity is therefore one that:
While regulations allow withdrawals between 2.5% and 17.5%, not all drawdown rates are sustainable.
| Common belief | Why it falls short |
|---|---|
| “4% is always safe” | Ignores fees, inflation, and market conditions |
| “Returns will fix it” | Encourages excessive risk |
| “I can reduce later” | Early damage is often permanent |
| Factor | Impact |
|---|---|
| Asset allocation | Supports long-term growth |
| Fees | Reduce returns every year |
| Inflation | Erodes income over time |
| Flexibility | Allows adjustment in poor years |
| Longevity | Requires long-term planning |
“A flexible, regularly reviewed drawdown strategy is far more effective than chasing a “perfect” percentage.”
A living annuity is best thought of as a long-term investment portfolio with withdrawals.
| Too conservative | More balanced |
|---|---|
| Lower volatility | Accepts managed volatility |
| Lower growth | Inflation-beating returns |
| Early capital erosion | Greater longevity |
| Strategy | Purpose |
|---|---|
| Diversification | Reduces concentration risk |
| Offshore exposure | Broadens opportunity set |
| Cash buffers | Avoids forced selling |
| Rebalancing | Controls risk over time |
| Fee type | Long-term effect |
|---|---|
| Platform fees | Reduce capital annually |
| Investment fees | Lower net returns |
| Compounding of costs | Material over decades |
| Characteristic | Why |
|---|---|
| Can tolerate volatility | Income is not guaranteed |
| Have flexible spending | Drawdowns can adjust |
| Have sufficient capital | Margin for error |
| Want estate flexibility | Capital passes to heirs |
| Situation | Risk |
|---|---|
| Need certainty | Market risk causes stress |
| Have limited capital | Little room for mistakes |
| Prefer simplicity | Ongoing decisions required |
A blended approach using both living and life annuities often produces better outcomes.
A living annuity should never exist in isolation.
| Planning area | Why it matters |
|---|---|
| Cash-flow planning | Matches income to spending |
| Investment planning | Supports sustainability |
| Tax planning | Improves after-tax income |
| Estate planning | Efficient wealth transfer |
| Longevity planning | Accounts for long retirements |
“Retirement is not a single event — it is a phase that evolves over time.”
Do Read: Our comprehensive retirement planning guide for South African investors.
Living annuities offer flexibility, control, and estate-planning benefits — but they also place responsibility firmly on the retiree. The most important decisions are rarely about choosing a product, but about sustainable income, sensible investment strategy, and managing risk through full market cycles.
If you’re approaching retirement, already retired, or unsure whether a living annuity is appropriate for your situation — particularly where portfolios, drawdowns, or investment decisions have become more complex — getting an objective second opinion can make a meaningful difference over time. Reach out to us here.
Carl-Peter is a Certified Financial Planner (CFP®) and director at Henceforward, with over 20 years’ experience in independent wealth management and retirement planning. He specialises in helping retirees and high-net-worth individuals navigate the complexities of post-retirement investing — including sustainable income planning, managing sequence-of-returns risk, and building resilient portfolios designed to last through full market cycles.
Based in the village of McGregor, Carl-Peter balances life advising clients with global perspectives on investing, long runs on local trails, and a strong belief that good financial decisions are as much about behaviour as they are about numbers.
