Common mistakes DIY investors make with living annuities
6 August 2025
The uncomfortable truth about retirement in South Africa - Rands and Sense by 10X [video]
We sit down with 10X Investment Consultant lead Andre Tuck and discuss the retirement savings crisis in South Africa. We also delve into living annuities, retirement annuities, TFSAs and everything in between. Read more
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More and more South Africans are deciding to manage their own investments, such as living annuities, without making use of a financial advisor. This comes with plenty of benefits, such as savings on advisor fees, as well as offering more control, but it can also result in decisions which may impact the long-term growth and sustainability of the investments.
A living annuity is a long-term investment product which provides the retiree with an income during their retirement years. This needs to be carefully managed in order to help ensure the growth and sustainability of the investment. In this article, we will delve deeper into some of the common mistakes made by investors and also offer some strategies on how you can avoid these mistakes in the future.
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Living Annuity calculatorQuick recap: What is a living annuity?
A living annuity is a long-term post-retirement investment product which is structured in a way that the funds remain invested while also providing the retiree with a regular income. A living annuity is funded by savings which has been transferred from an investment product, such as a retirement annuity or preservation fund, at retirement age, which is currently from age 55 in South Africa.
It is a long-term investment which may span from 25 to 40 years. It offers flexibility to the retiree in terms of the drawdown rate selected and also the asset allocation of the underlying funds. A drawdown rate of between 2.5% and 17.5% may be selected each year prior to the policy anniversary date. You are also able to select the frequency of the payments. These may be paid out annually, semi-annually, quarterly or monthly, depending on your requirements.
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As an investor, you can also choose from a selection of funds with different asset allocations, which is the mix of assets such as equities, bonds, real estate and cash - according to your investor profile and time horizons. This asset allocation may be amended as your financial requirements and needs change over time. Let’s go over some of the most common mistakes that investors make when managing living annuities.
Mistake 1: Drawing too much, too soon
The flexibility of living annuities can be a great advantage, but it can also lead to overzealousness. It can be tempting to select a high drawdown rate of between 10 to 17.5% in order to boost income and enjoy the retirement years to their fullest. However, this can affect the sustainability of your living annuity and result in the capital running out too soon.
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You want your living annuity to last for the duration of your retirement years. As such, you would preferably want to select a lower drawdown rate that leaves more room for your savings to remain invested and allow your capital investment to grow, and potentially compound this growth over time.
Generally, financial experts believe that a drawdown rate of 4% is considered potentially sustainable. A higher drawdown rate may mean that your capital reduces too quickly; this would be even more pronounced in the earlier years when your capital has not had a chance grow at all.
Mistake 2: Ignoring inflation when planning for income
Inflation reduces the purchasing power of your capital, a trend that becomes more pronounced over time. This is clear to see in the steady rise in the prices of goods and services from one year to the next.
In South Africa, inflation is typically around 5% to 6%, so this can have a significant effect on the purchasing power of your money and your living annuity. Ideally, you want your living annuity to outperform inflation over the long term. This ensures that you are not reducing the real value of your capital.
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Even modest inflation, when sustained over many years, can reduce your savings a lot more than you might expect. If you’re a retiree relying on a fixed income, your standard of living may suffer. Always factor inflation into your financial planning to make sure that your capital maintains its value and your retirement needs are met.
Mistake 3: Overloading on cash and low-risk assets
If you’re a risk-averse investor, you may find yourself investing more heavily in cash and bonds when selecting a fund that that you feel is in line with your retirement goals. Both cash and bonds are less volatile than equities. While bringing more stability to a portfolio, cash and bonds may generate lower returns than equities. Equities may potentially generate the best returns in the long term, but that comes with inreased volatility and risk.
We see that they have historically produced returns above inflation by around 7% annually over the long term (based on JSE All Share Index performance versus CPI from 1960-2020); however, past performance does not guarantee future results. Cash is the most stable of the asset classes, but it is likely to bring in the lowest returns of the asset classes. The returns generated may even be less than the inflation rate, meaning that your living annuity is not growing – in fact, in that scenario you are losing money. In order to see growth in your living annuity, you need to ensure that the returns that are generated are more than the sum of the inflation rate, fees and your drawdown rate.
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Diversifying across the different asset classes is essentially making sure that you don’t have ‘all your eggs in one basket’. This concept would then allow you to potentially take advantage of any gains in certain asset classes while also mitigating against any losses in other asset classes. By diversifying offshore, you can take advantage of the opportunities on offer in the international market, which is vast in comparison to the size of the South African market. This may also help mitigate against any local market volatility and subsequent impact on the Rand.
10X offers a range of different funds within the living annuity, each suited to different investor profiles. Our 10X living annuity is also able to be invested 100% offshore. This is an attractive offering, especially for an investor who is already heavily invested in the local South African market. For further information on the 10X living annuity, follow this link.
Mistake 4: Paying high fees without realising it
By investing directly, you are saving on financial advisor fees, which may include both ongoing and annual fees. However, you need to ensure that the other fees, such as administration and management fees are not too high. High fees can impact the growth of your living annuity over time as there are less returns available to be reinvested and potentially grow and compound over the long term.
Compare your retirement investments
Effective annual cost calculatorThe Effective Annual Cost (EAC) of an investment refers to the fees and costs which are charged for owning an investment over a one-year period of time. This is a metric which was introduced by ASISA in 2015. You can use this information to compare with other service providers. Included in the EAC, you will usually see the following:
- Administration fees: Fees which are related to administration tasks. These may be tasks such as tax, reporting and compliance.
- Management fees: Fees related to the management of the fund.
- Advisor fees: Fees charged by an advisor for the services and advice. There may be both an initial and an ongoing fee charged.
- Other: You may also see charges such as early exit penalties charged. These may be applicable to certain products.
All things being equal, you may find that a higher EAC results in less of your returns being reinvested and allowed to potentially grow and compound over time compared to a lower EAC, which may then leave more returns available to be reinvested and allowed to potentially grow and compound over the long term.
Based on a 40-year investment horizon, research shows that just a 0.5% increase in fees can potentially reduce your final retirement amount by 20%, assuming all other factors remain constant. This is based on the compounding effect of fees over time. You can learn more about the importance of fees here.
You may look at choosing an index-tracking investment strategy, also known as passive investing. The costs involved with this kind of investment strategy can be lower, as there are likely less research, analysis and buying and selling costs involved. A benchmark index, such as the S&P 500, is mirrored in terms of its equity split in order to match it’s performance.
An active investment strategy on the other hand is when a fund manager is tasked with picking the winning stocks that will generate the best returns. There can be a lot of research and trading costs associated with an investment strategy, which may mean higher costs. These higher costs might then be passed on to the investor. 10X uses an index tracking investment strategy with a more active approach to asset allocation, making us a cost-effective choice of service provider. As data from the SPIVA Scorecards suggests, index tracking outperforms active management most of the time, especially over the longer term. According to the latest SPIVA South Africa Scorecard (as of 31 December 2024), 60.84% of South African actively managed equity funds underperformed the S&P South Africa DSW Capped Index over the ten years ending 31 December 2024.
You would also want to ensure that you are aware of your EAC. This can be found on your investment statement. Otherwise, this can be requested from your service provider. You should regularly review and compare your EAC with that of other service providers. 10X offers a free EAC calculator as part of our online suite of tools on offer.
Mistake 5: Failing to review the portfolio
It is easy to select your fund and its curated asset allocation when setting up your living annuity, and then neglect to review and adjust this asset allocation as time goes on. It’s important to review your underlying portfolio and asset allocation annually to ensure that it is still meeting your financial goals and requirements. Over time, both markets and personal circumstances change. You may find that the asset allocation that worked before is no longer as effective or in line with your retirement goals. The fund that you select should align with your risk tolerance, time horizon, income needs and long-term goals. By regularly reviewing your living annuity portfolio, you can make sure to adjust whenever necessary to stay on track and avoid unintended exposure to risk or underperformance.
Mistake 6: Emotional investing and reacting to market noise
You should never make any emotional or rushed decisions in response to the market and market volatility. Investing is a long-term process, and you can expect to see volatility and market highs and lows over time.
The important thing is not to react to this market volatility, but rather to keep your funds invested. This will allow for the subsequent market recovery to take place and ensure that you don’t lock in any losses. Focusing on your long-term goals and financial plan will help keep you on track and avoid any distractions along the way.
Mistake 7: Poor estate planning
When setting up your living annuity, you should ensure that you nominate your preferred beneficiaries. The nominated beneficiaries will then receive the funds left in the living annuity upon your death. If you do not nominate a beneficiary, then funds will be left to your estate, and this can be a lengthy and costly process to wrap up.
This may in turn result in your spouse or dependents being without income for a period of time. If you have not nominated a beneficiary, the remainder of the living annuity may form a part of your estate and be taxed accordingly. It’s important to regularly review your beneficiaries to ensure that your nominated beneficiaries are up-to-date and reflect your wishes.
Conclusion: How not to make living annuity mistakes
It is possible to set up and structure a living annuity without the assistance of a financial advisor, and there are plenty of benefits in doing so. It's important to be disciplined and understand your investment strategy as you go progress in retirement. By being aware of some of the common pitfalls that investors encounter and neglect, such as high fees, high drawdown rates, poor asset allocation and disregarding inflation, you can help to ensure that you set up your living annuity optimally.
Regularly reviewing your fees and asset allocation to ensure that they are still aligned with your goals and making changes accordingly is vital. If you find that you need assistance or guidance with setting up or restructuring your living annuity, don’t hesitate to contact the experienced and knowledgeable investment consultants at 10X. Secure your future and invest with 10X today!
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