after-retirement / retirement-planning

Living Annuities: Adjust Your Drawdown Rate to Maximise Retirement Income

3 July 2024

A living annuity is an investment product that allows you to invest your retirement savings with the flexibility of managing your investments and income level, and switching providers if you are unhappy with returns.  A living annuity generates income via drawdowns – withdrawals you make on a schedule you set – ideally from the returns of your investments and not the original capital itself. The core idea of living annuities is to put your money to work via investments in various assets, so that you are able to live off of your investment returns rather than original capital. Central to a living annuity is the ability to adjust your income drawdown rate strategically, in order to ensure your retirement income sees you through a comfortable retirement, and the ability to leave your capital to nominated beneficiaries (which is not the case with a life or guaranteed annuity).

At 10X Investments, we understand that everyone’s retirement needs and financial circumstances are different. In recognition of this, we aim to clarify the process of investing in and withdrawing from a living annuity to ensure you approach retirement with a robust savings and investment plan.

living annuity calculator

Living Annuities: Longevity And Fee Considerations

The three most important considerations to make when deciding to invest in a living annuity are the risk of outliving your retirement savings, the impact of inflation on the purchasing power of your retirement income, and the fees you pay on that investment 

When deciding on a living annuity, it is very important to take measures to ensure your capital lasts as long as your life through retirement – and ideally, grows as well. Aside from financial security for yourself, you are able to bequeath the remainder of your living annuity to your chosen beneficiaries upon your passing. The risk of outliving your savings is referred to as longevity risk. 

A key approach to mitigating longevity risk is to aim to only draw down from the growth of your capital, and keep the capital itself intact. The golden equation is that drawdowns + inflation + fees must be equal to or less than investment returns in order to not deplete the original investment capital. 

This is one way that living annuities are differentiated from guaranteed or life annuities; while opting for a guaranteed or life annuity protects you against longevity risk (and investment risk), you may find that your predetermined income won’t provide what you require if inflation rises – even if that annuity is inflation-linked or has a fixed escalation. With a living annuity, as mentioned, you are able to adjust your drawdown rate in light of changing financial factors, like inflation, thereby allowing you flexibility with your income.

In many ways, reviewing and adjusting your drawdown rate is a balancing act. Retirees with living annuities should aim to balance their drawdown rates to mitigate both longevity and inflation risks. You may find that for the first few years of retirement, setting a conservative drawdown rate helps to preserve your capital while you grow your funds through investment returns. Obviously, having other sources of income, however temporary, can help this process.

Additionally, you’ll want to consider fees. Low fees are crucial for maximising the benefits of a living annuity because they directly impact the longevity and growth of your retirement savings. High fees can significantly reduce your overall returns, causing your savings to deplete faster. When fees are high, a larger portion of your returns is taken each month, reducing the amount of money that remains invested. Over time, there is less capital to generate further returns. This compounding effect means that even small differences in fees can have substantial impact on the value of your investment over the long term. Essentially, the more you pay in fees, the faster your savings will dwindle. Take the time to understand your Effective Annual Cost (this is the total amount you pay as a percentage of your investment) and do a Comparison between providers if you suspect your chosen provider’s fees are too high. As any financial consultant will tell you, the compounding effect of high fees is a killer. By minimising fees, more of your money remains invested, allowing for potential growth and a longer-lasting income stream. For example; 10X Investments offers a competitive fee structure of 0.86% per annum compared to a typical high-fee alternative of 2.5% per annum. Over 20 years, an initial investment of R1,000,000 with a 6% annual return before fees would grow to approximately R2,733,917 with 10X, while only reaching R1,998,611 with a provider with higher fees. This significant difference of R735,306 highlights the importance of low fees in enhancing retirement savings. 

But don’t just take our word for it – check out the testimonials from a few of our satisfied customers. One such customer, Felicia Roman, experienced minimal growth in her savings with a traditional provider, with her returns barely exceeding her contributions. After switching to 10X, she was able to see substantial growth on her investment thanks to our low fees and transparent practices. She was also appreciative of our clear communication and “balanced view” of her situation, with comprehensive support from a 10X consultant. You can read more about Felicia’s experience here

With a 10X Living Annuity, you’re able to engage with our consultants (at no cost to you) to create a withdrawal and investment strategy that takes into account your unique investment needs. A balanced and adaptive approach combined with superior fund performance will allow you to enjoy a steady income, while protecting your capital against the risk of outliving your resources or erosion due to inflation.

Additionally, 10X’s consistently low fees in comparison to other LA providers means you’re losing as little to fees as possible. With significant cost-savings to be found the lower your fees are, a living annuity with 10X directly equates to enhanced capital growth. Experiencing increased growth of your retirement savings is as easy as changing your living annuity provider, and this process is easier than ever with 10X. We offer a straightforward approach to understanding and managing your investment, and a seamless transition too. Simply get in touch with one of our consultants to learn more about the flexibility of your options.

comparison report living annuity retirement annuity

Understanding Drawdown Rates

With a living annuity, your income is adjustable. If one year you foresee needing more income, and the next year you find you need less, you are able to adjust your drawdown rate accordingly. ‘Drawdown rate’ in the context of living annuities refers to the percentage of the total value of funds in your annuity that is withdrawn to provide you with an income. You are able to adjust your drawdown rate on an annual basis, and you are also able to adjust your income schedule: whether you receive your income on a monthly, quarterly, semi-annual, or annual basis.It is important to note that these choices must be made prior to your policy anniversary date.

Drawdown rates in South Africa are set by SARS at a minimum of 2.5% and a maximum of 17.5%. Of course, the lower your drawdown rate, the more sustainable your living annuity fund will be, by virtue of the fact that you are less likely to deplete the money in your living annuity when withdrawing a smaller percentage of it as income (your drawdowns plus inflation and fees should not be more than the return on your investments to ensure you don’t eat into the original investment capital). Generally, a 4% drawdown rate is ideal for ensuring the long-term sustainability of your fund. 

Some retirees find that even withdrawing the minimum of 2.5% can mean more income than they require at a particular time. In this case, you should consider taking the funds that you receive via drawdown income from your annuity, and reinvesting those funds back into a retirement annuity, from which you can then transfer those funds into your current living annuity (or open another one) whenever you like. This is a savvy way of maintaining the tax advantages of retirement savings while you are retired. It is also important to note that, while the income you take out of a living annuity is taxed according to standard income tax (see here for SARS’ tax rate table), the growth of funds in your LA is not taxed as capital gains.

For potential investors with a longer time horizon before retirement, making use of our living annuities calculator can be helpful in approximating the income you are on track to receive at your projected retirement age, according to your current retirement savings. 

Impact Of Market Conditions On Drawdown Rates

Also fundamental to a living annuity is the fact that you, as the annuitant, take more responsibility for managing your investments and the associated risks. Whereas with a life (guaranteed) annuity, for example, the insurer from whom you purchase your guaranteed annuity would absorb any losses caused by volatility in the underlying investment, with a living annuity you enjoy greater flexibility but your funds are subject to typical investment risks i.e. fluctuations in the markets. 

So, making sure your investment is optimally allocated across different asset classes is important in order to consistently grow your funds, beat inflation, and provide diversification to mitigate risk. You are able to change the underlying fund within the LA itself as you desire, allowing you to go from higher to lower risk and different asset allocations depending on your unique situation and requirement. Obviously, our investment team is constantly looking to optimise your investments – if you win, we win – and often, it is best to leave these kinds of decisions to professionals working day in and day out in the arena. The point is that this flexibility is available to you when you invest in living annuity with 10X.

Similar to other investment vehicles, market conditions affect the value of investments within a living annuity. The direction of the market is a major factor impacting the performance of your portfolio – so you’re going to want to have a firm grasp of the ins and outs of common market conditions and fluctuations. Luckily, you don’t have to do any work to get this information. 10X provides you with regular updates on the performance of your investments and our opinion on the conditions of the market at any given time. 

You may have heard the terms ‘bull’ and ‘bear’ market in investment conversations. In short, a bull market is typically indicated by rising stock prices , whereas in a bear market stocks usually decline in value over a longer period of time. 

So, how would bull and bear markets impact investments in a living annuity? In a bull market, typically the value of underlying investments within your annuity portfolio increases, leading to higher overall asset value. With the rising value of your investments, you may opt to increase your drawdown rate to receive a larger income, without the risk of depleting your funds. On the other hand, in a bear market, investments in a living annuity could face challenges. Your return on investment may be lower, in which case the ability to adjust your drawdown rate downwards could be valuable in protecting your underlying capital. 

One way investors seek to mitigate market risk in their living annuity investments is via increased offshore exposure. A living annuity is not governed by Regulation 28 of the Pensions Act, so you are not subject to a 45% offshore investment limit. With 10X, you can invest up to 100% offshore should you choose to. Investing offshore opens up access to broader investment opportunities, and allows investors to diversify away from country-specific risks. Our data suggests between 40% and 60% offshore investment is the range that adds the most diversification benefits for a Rand-based investor without compromising the sustainability of the living annuity.

With a 100% track record of market outperformance and a highly diversified portfolio, we’re here to help you navigate any uncertainties with your retirement investments. By looking at your projected expenses for the following year and discussing these with a 10X consultant, you can adjust your drawdown rate with a holistic view of your financial circumstances while avoiding the risk of depleting your funds prematurely. This foresite, coupled with 10X’s famously low fees, will secure you more years of retirement income. At 10X, we prioritise continuous support and low fees, and our flagship fund consistently outperforms market benchmarks – by partnering with 10X for your living annuity investment, you can rest assured that we’re here to make your money work for you.

Tools And Resources

At 10X Investments, our exceptional service and deep expertise equips you in making informed decisions about your retirement income plan. Retirees can also effectively plan their drawdown rates by making use of 10X’s Living Annuities Calculator, and for those considering moving their living annuity from their current provider to 10X, we provide Free Cost Comparisons to highlight 10X’s cost-saving opportunities.

It’s recommended that retirees consult with a financial advisor when assessing the ideal drawdown rate for their annuity payments, to ensure they have a broad view of the considerations to be made. Financial advisors will also be able to assist with best practices for adjusting your drawdown rate. These best practices may include:

Regular review of your annuity’s performance (at least annually) to ascertain whether your current drawdown rate is sustainable within the current market conditions and investment returns.

Understanding fees and the impact that high fees can have on your living annuity investment is crucial. As mentioned, high fees can erode your savings over time, leaving you with significantly less money for retirement. A low fee margin, on the other hand, can contribute significantly to the performance of your total funds. A simple 1% savings in fees can mean up to 30% more money in retirement. 

Consider maintaining a buffer by keeping a portion of your fund liquid when you invest in a living annuity to cover short-term needs while setting a low drawdown rate. By law you are only required to convert a minimum of two-thirds of your retirement savings into a living annuity when you retire - some of those funds can therefore be withdrawn as cash. 

Maintain an emergency fund which is separate from your annuity to cover unexpected or emergency expenses, to ensure that your regular withdrawals are not disrupted by unforeseen events.

The benefits and responsibilities of a living annuity are two sides of the same coin. With an LA, you are responsible for strategically adjusting your drawdown rate to ensure the sustainability of your fund, and with this responsibility comes the benefit of flexible withdrawals and reaping the returns of your investments. 

For more information about living annuities, explore our comprehensive resources on the subject or check out our blog posts for informative insights. Our consultants would also be happy to discuss your current situation – simply fill out a contact form and we’ll get in touch.

10X Investments is an authorised Financial Services Provider (FSP number 28250). The content herein is provided as general information and is not intended as nor does it constitute tax, legal, investment, or financial advice as defined by the Financial Advisory and Intermediary Services Act, 2002.

The 10X Living Annuity is underwritten by Guardrisk Life Ltd.

10X Fund Managers (RF) (Pty) Ltd is an approved manager of collective investments schemes in securities in terms of Section 42 of the Collective Investments Schemes Control Act, 45 of 2002.

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