Living annuity income frequency: Choosing the right payment schedule for your retirement

Building blocks to a lasting Living Annuity

Our panel of experts discusses living annuities, sustainable drawdown rates, offshore investing, and everything else one might need to consider to ensure a comfortable retirement. Read more

A living annuity is a post-retirement investment vehicle that allows you to draw an income while still keeping the capital invested, allowing for potential growth over time. It is a flexible investment product where you can select your drawdown rate annually, as well as your payment frequency. These can be altered to accommodate changing needs and financial requirements over time.  

As an investor, you should consider all factors when choosing your payment frequency, as well as how much you draw out from your living annuity annually. Payment frequency is an extremely important consideration when it comes to areas like budgeting and financial peace of mind. This article will help guide you on how to make the right frequency choice for your personal situation. 

The basics of living annuity income frequency  

When managing your living annuity, you can select your payment frequency. This is essentially how often you receive your income payouts during the year. You can choose from annual, biannually, quarterly or monthly payments, depending on your preferences. Living annuity income is usually paid in advance, except for monthly income payments, which are paid in arrears.  

Your drawdown rate can also be selected each year. This is the percentage of the total value of your annuity that you withdraw each year. Current regulations allow you to select a drawdown rate of between 2.5% and 17.5%. Generally, the goal is to choose a drawdown rate that is sustainable. Financial experts agree that a drawdown rate of 4% is generally thought to be sustainable, but nothing can be guaranteed, and personal circumstances will vary.  

As you’re no longer working, or at least, working as hard, you need your retirement income to last. Selecting a higher drawdown rate may mean that your savings run out too quickly, which can be a major disaster.  

The Rule of 4%: Will Your Retirement Savings Last?

Explore the 4% rule for retirement withdrawals and understand how fees impact your retirement income. Learn about sustainable drawdown rates, the effects of inflation, and how to make your retirement savings last longer with 10X's low-fee approach. Read more

Both the payment frequency and drawdown rate can be amended each year before your policy’s anniversary date. Your policy anniversary date is the date on which you started your annuity. 

Budgeting and cash flow implications  

When deciding on the payment frequency that works best for you, you will need to consider each option and evaluate how each would work for you and your lifestyle. 

Let’s look at the implications of each payment frequency on your budget and also the subsequent cash flow: 

Monthly payments: This would provide you with a steady, regular income. Similar to what you might have received as a salaried employee. 

Quarterly payments: This would mean a bigger payment, which you receive every three months. You would then need to budget these savings for that period of time.  

Biannual payments: Here, you would receive your payments twice per annum. This would once again require some careful budgeting, as you need to decide how to split your income over the 6 months. Choosing biannual payments demands a higher standard of self-discipline.  

Annual payments: You would be paid your income once per year in this situation. As such, this requires a fair amount of budgeting to ensure you have sufficient savings available across the year. If you are reliant on your living annuity to cover ongoing costs, you need to ensure that you avoid overspending earlier in the year.  

10X offers a cost-effective living annuity which aims to get excellent returns for our clients. We also allow for the living annuity to be invested 100% offshore, if preferred. This may be a good opportunity for you if you are already heavily invested in the local South African market. Find out more here.   

Money mistakes to avoid during retirement

Retirement should be a time for relaxation. These tips will help you reduce the stress of your golden years, and retire better! Read more

Behavioural and psychological factors  

As you decide on your income frequency, it should be recognised that these decisions are not just driven by financial circumstances, but by psychology and human behaviour.  

If you have previously been a salaried employee, you may prefer to receive your income monthly. This feeling of familiarity, alongside the comfort and stability which come with receiving a monthly income, can put investors at ease. This routine mimics the rhythm of monthly employment, so investors often find it easier to manage day-to-day expenses, plan for recurring bills and maintain a sense of stability.  

In contrast, choosing a quarterly, biannual or annual payment demands greater self-control and more comprehensive forward planning. While a large lump sum can feel very satisfying and offer greater flexibility, investors are more prone to spending freely. This can lead to your savings depleting quicker than you were expecting. Spending too much earlier in the year can make the end of the year more difficult to manage.  

Self-awareness is incredibly important when deciding on income frequency. If you know you are ill-disciplined when it comes to your spending habits and find it hard to stick to a budget, choosing a monthly payout is the safer, more reasonable option. If you know that you are disciplined and comfortable with managing money, the flexibility of an annual, biannual or quarterly payment may be more suited to your lifestyle. At the end of the day, you know yourself best when it comes to your habits surrounding money.  

Matching frequency to lifestyle needs 

A good strategy when deciding on your payment frequency is to match this to your lifestyle needs. Let’s look at a few examples in some more detail: 

Example 1 - Retirees with monthly payments: If you are a retiree who has regular monthly expenses, then a monthly drawdown could make sense for you to match your expenses to your income.  

Example 2 - Retirees with seasonal payments: Perhaps you are a retiree who has seasonal payments, such as an overseas holiday to visit family each year. Here, an annual or biannual income payment may be best-suited. 

Example 3 - Retirees with other incomes: If you are a retiree who has other sources of income, such as from a rental property, then quarterly payments may work for you as you already have other income coming in and may only require a bit extra to fill in the gaps.  

Example 4 - Retirees with another main source of income: You may be in the position where you have an additional main source of income. In this situation, you may have opted for the minimum 2.5% drawdown rate, as you don't have a huge need for this income and would prefer the capital to stay invested. As you do not need the income to pay for your expenses, getting paid out annually makes more sense.  

Diversifying your asset allocation for growth 

As mentioned, living annuities provide flexibility. This flexibility includes flexibility when it comes to your living annuity’s asset allocation. Within your living annuity wrapper, you would look to invest your savings in a variety of different asset classes. These asset classes are usually equities, bonds, real estate (property) and cash. As an investor with 10X, you can choose from a selection of carefully curated funds, each with a different asset allocation and geared towards different investor profiles.   

We've built the 'happy retirement' machine

Understanding the most effective strategy for investing your retirement savings is fundamental to experiencing a happy retirement. We've built an investment machine that gives you a great chance of really golden years. Read more

Diversifying across the asset classes is generally the most sensible move. This allows you to reap any gains that may occur in certain asset classes while also adding in some protection against any short-term market volatility that may occur in other asset classes. You may also wish to further diversify by adding some offshore exposure. This may provide some protection against local market instability as well as any depreciation of the rand. 

You would also want to ensure that you include a percentage of equities in your portfolio to help outpace inflation. Equities are considered the most volatile of the asset classes, but they may also produce the best returns over the long term. Data suggests that equities 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). Bonds and cash add stability to a portfolio, with cash usually generating the lowest returns of all the asset classes.  

If you are a younger retiree looking at longer time horizons, you may wish to include a higher percentage of equities in your profile. If you are an older retiree with shorter timelines on hand, you may consider including a higher percentage of bonds in your portfolio for stability.  

10X offers a variety of different funds diversified across the asset classes, each suited to investors with different levels of risk. Please visit our website here to see our funds.  

Fees and their impact on your living annuity 

Fees are another facet of your living annuity that needs to be carefully monitored and evaluated. Often, investors fail to realise the major role that fees play in retirement outcomes. Higher fees have the effect of reducing the returns that you have available to reinvest and potentially grow over the long term. Lower fees may mean that there are more savings available to be reinvested and allowed to potentially compound over time.  

As an investor, the best way to get a full picture of your fees is to view the Effective Annual Cost (EAC) of your living annuity. This is a useful metric introduced by ASISA in 2015, providing investors with information covering the fees associated with owning an investment product over a one-year period of time. All things being equal, a higher EAC would result in fewer returns available to be reinvested, while a lower EAC may mean that there are more returns to be reinvested to help grow your annuity when compounded over time. When you are comparing service providers, the EAC is just one factor to consider. 

 The usual fees which you may see charged on your annuity are as follows:  

Administration fees: Fees charged for administration-related tasks. These could be tasks such as reporting and tax.  

Management fees: Fees charged for the management of the fund.  

Advisor fees: Fees which are charged by the advisor for financial guidance and services provided. You may see both an initial and an ongoing fee charged.  

Let’s look at an example to help illustrate the effect of fees on your living annuity:  We will assume the following information: 

• Investment amount: R2 million 
• Investment period of 25 years 
• Drawdown rate: 4% 
• Return of 12% per annum 
• An inflation rate of 6% 

Example 1 (0.86% Fees): Real investment value is approximately R2.36 million. 

Example 2 (3% Fees): Real investment value is approximately R1.45 million. 

As you can see, the difference in fees of just over 2% in fees can potentially impact the real investment value of your living annuity. This is especially noticeable when fees are compounded over time. This example is for illustrative purposes only, and actual results may vary. 

At 10X, we take a simple approach to fees. Our fees are cost-effective and transparent, with no hidden costs. We charge lower fees of less than 1% for most retirement products.

Final thoughts on living annuity income frequency 

Your drawdown rate is an important factor in the sustainability of your living annuity, but the payment frequency that you select for your income also plays a major role when it comes to areas such as budgeting and your own financial comfort. When deciding on the best payment frequency for your own needs, you would look at factors such as your lifestyle, budgeting abilities and personal behaviour.  

Each investor’s situation is unique and therefore would need to be considered individually in order to choose the best fit. This is an area that you should reassess annually and, if necessary, make any changes at your policy anniversary date.  

If you need any assistance with managing your living annuity, please feel free to get in touch with the experienced and knowledgeable investment consultants at 10X, who will be happy to guide you. Get in touch today and secure your future with 10X.