Living annuity planning: Understanding the rules before you retire

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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

Planning for a living annuity should ideally begin before retirement. While offering flexibility to retirees, it requires careful management and strategic planning. You need to evaluate your income needs, choose suitable funds, and ensure the sustainability of your capital. In this article, we will explore in detail how living annuities function, considerations for drawdown rates, fund selection, fees, beneficiary nominations, tax implications, and how 10X can assist you as an investor.

Living annuity rules: Why you need to understand how it works

Retirement is not only about deciding when to stop working; you will also want to consider what you are going to do with your retirement savings and the implications of this. Your annuity will be funded from your savings held in your retirement products, such as a retirement annuity and preservation fund.

This is why it helps to understand your options before your retirement date arrives. Once you retire from a retirement fund, you may need to make decisions about how much to take as a lump sum, what type of annuity to choose, how much income you need and how your remaining capital should be invested. These decisions can affect your income, tax position and long-term retirement plan.

You will need to take into account any tax considerations for your retirement savings. Any lump sum withdrawals are taxed according to the retirement lump sum tax tables, while your living annuity income withdrawals will also be taxed. Understanding this beforehand can help you avoid focusing only on the gross amount available to you. What matters in practice is how your retirement savings will support your income after tax, fees, and inflation have been accounted for.

Rules surrounding living annuities can help you to be better informed when it comes to your retirement decision-making and your annuity management. The more familiar you are with these rules, the better prepared you may be to ask the right questions before committing to an annuity. These include questions about drawdown limits, fund selection, annual reviews, beneficiary nominations and the level of flexibility you will have once your income payments begin.

Rule 1: A living annuity gives you flexibility, but not guarantees

A living annuity is a flexible post-retirement product that provides you with income for your retirement years. You will draw an income, while your remaining capital will stay invested in the market. You will also be able to select the underlying funds that your capital is invested in. From age 55, you can transfer the capital to an annuity of your choice.

An annuity needs to be carefully managed in order to help ensure the sustainability of your money. You do not want to outlive your annuity, so you will need to be strategic about your drawdown rate, funds, fees, inflation, and longevity risk. Longevity risk is the risk that you outlive your annuity, and it is unable to provide you with an income for the duration of your retirement years.

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Rule 2: Your drawdown rate must fall within the legal range

You are able to select your drawdown rate annually, prior to your policy anniversary date. Your drawdown refers to the percentage of the total value of your annuity that you draw an income from each year. Current regulations state that you are able to select a drawdown rate of between 2.5% and 17.5% per annum. Not only should your drawdown rate fall within the legal range, but it should also be sustainable. While many financial experts consider 4%, a rule developed by William Bengen, to be a sustainable rate, nothing can be guaranteed.

Each drawdown decision balances your immediate income needs with preserving your capital for the future. The aim is to choose an income level that supports you in retirement without putting too much strain on your investments or risking running out of money too soon. Your policy anniversary date provides a chance to review the income you're taking relative to your portfolio's performance, inflation, current expenses, and your remaining time horizon. A drawdown rate that was appropriate five years ago may no longer align with your current situation.

Rule 3: You can review your income once a year

You are able to review your living annuity at the policy anniversary date each year, as mentioned. Your policy anniversary date is the date your annuity started. This is the date at which any changes to your annuity drawdown rate will need to be submitted to your servicing company.

For this reason, it is useful to start the review process before the policy anniversary date arrives, rather than waiting until the last moment. This gives you time to consider whether your current income level still meets your needs and whether any changes are needed for the year ahead.

This is a good opportunity to review your living annuity in its entirety. You would review your annuity each year to ensure it remains well aligned with your long-term goals. You would review your drawdown rate, fund selection, inflation rate, investment performance and beneficiary nominations. These factors should be considered together, as one decision affects the next. As an example, a higher drawdown rate may place more pressure on your capital, while fund performance, fees and inflation may influence how sustainable that income remains over time.

Your annual review is also a great time to think about whether your personal circumstances have changed. Your expenses, health needs, other income sources or family situation may look different from the previous year, and your living annuity should be reviewed with these changes in mind.

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Rule 4: Your investment choices matter after retirement

Your living annuity capital will be invested in the market, so your asset allocation remains as important as it was before your retirement. Research by Brinson, Singer, and Beebower highlights the importance of asset allocation for investment performance. Asset allocation refers to the mix of different asset classes that your capital is invested in.

As a 10X investor, you do not need to choose individual shares, bonds or properties yourself. Instead, you are able to select from a range of diversified 10X investment funds. Each fund has a predetermined combination of asset classes and is designed for a specific type of investor, risk profile and investment horizon. You can choose the fund that most closely aligns with your financial goals, time horizon, and risk profile. The usual asset classes are equities, real estate, bonds and cash.

Equities are often included to provide long-term capital growth in a portfolio as well as returns that beat inflation. Equities provide exposure to companies and economic growth, but their values may fluctuate considerably over shorter periods. Therefore, they may be better suited to your portfolio if you have longer time horizons and the ability to tolerate volatility. Equities have historically delivered returns above inflation by approximately 7% annually over long periods (based on JSE All Share Index performance versus CPI from 1960-2020)

Real estate may help to drive long-term growth in your portfolio. It also provides exposure to real assets and economic activity, while producing income through rentals and distributions. You may notice that listed property can be volatile and it may be influenced by interest rates, economic conditions, occupancy levels and changes in the property market. Real estate may also serve as a good hedge against inflation.

Bonds can provide diversification, income and some stability within a portfolio. They are usually less volatile than equities, but this does not mean that they are risk-free. Bond values can be affected by changes in interest rates, inflation expectations and the ability of the issuer to repay its debt. They still may outperform expectations, despite being more conservative.

Cash is usually the most stable of the asset classes. It is less volatile than equities or real estate. Cash returns may, however, struggle to keep up with inflation over the long term, which can reduce purchasing power.

Offshore assets provide investors with exposure to a broader range of industries, businesses, currencies and economies outside South Africa. This can improve diversification and reduce reliance on the performance of the local market. Offshore investing also introduces additional risks, such as currency fluctuations, changes in global markets, geopolitical events and differing regulatory or tax considerations.

At 10X, you can expect a well-diversified fund selection that allows you to select the fund that best suits your needs. Please visit our fund information page to find out more about the funds on offer.

Rule 5: Living annuities are not subject to Regulation 28

Unlike retirement products such as preservation funds or retirement annuities, living annuities are not subject to Regulation 28 of the Pension Funds Act. This means that you have more freedom when it comes to investing in both equities and offshore.

This can be an important advantage for retirees who want more control over how their annuity capital is invested. For example, you may want broader global exposure, a higher allocation to growth assets, or a fund mix that better reflects your income needs and retirement timeline.

It is important that this greater flexibility is carefully managed. You may not necessarily want to invest more in equities or offshore just because there are no limits in place. You would still be wise to align your selected asset allocation with your risk profile, investment timelines, and long-term financial plans and goals. The key point is that flexibility should still be used with purpose.

A living annuity may need to support you for many years, so your fund selection should take into account your drawdown rate, tolerance for volatility, inflation risk and need for long-term capital sustainability.

Rule 6: Tax still matters in retirement

When planning your income and drawdown rates, it is important to take into account that you may need to pay tax on your income. These tax thresholds may also be affected by your age, so it’s important to keep track of changes from year to year.

SARS states that the current minimum income tax thresholds are as follows: For 1 March 2026 to 28 February 2027, SARS lists the following tax thresholds on its website: R99,000 for taxpayers under 65, R153,250 for taxpayers aged 65 and older, and R171,300 for taxpayers aged 75 and older.

If you are going to take a lump-sum cash amount at retirement, it will be taxed according to the retirement lump-sum tax tables as mentioned on the SARS website. This should be considered before any decisions are made.

Rule 7: Beneficiary nominations should be reviewed before and after retirement

A major appeal of living annuities is how the remaining capital can be paid directly to nominated beneficiaries outside of the estate upon your death. This can make beneficiary nominations an important part of your broader estate planning, subject to tax and product rules. As a beneficiary, you may be able to receive remaining living annuity capital as a lump sum, an annuity or a mix of both.

It’s important that you check your beneficiary nominations and ensure they are up to date and correctly reflect your wishes. It’s vital to update your beneficiaries after any major life event such as a death, divorce, marriage or similar.

Rule 8: Fees can affect how long your income lasts

Your living annuity portfolio needs to be able to cover your income withdrawals and fees. Therefore, you should look to minimise fees as much as possible. Higher fees may mean that there are fewer returns available to reinvest and potentially grow over time. You may see the following terms on your statement:

• Total Expense Ratio (TER): This ratio is a way to compare the operating costs of similar funds, but it is not the final cost.
• Total Investment Charge (TIC): A useful comparison of the full cost of the investment portfolio.
• EAC (Effective Annual Cost): An annualised estimate of the impact of product, investment management advice, administration fees, and all other applicable charges.

Effective Annual Cost (EAC) is a standardised metric that was introduced by ASISA in 2015. Assuming all other factors are equal, a lower EAC may usually mean that a larger portion of your money remains invested and available to potentially earn returns over time. A higher EAC may result in fewer returns to reinvest, potentially limiting growth over the long term. Costs should be one of the factors to consider, as other factors like investment strategy, risk, service and product features also play an important role. The following fees are some of the typical fees that you may be charged:

• Administration fees: These will be the fees that are charged for admin-related tasks like compliance, tax and reporting.
• Management fees: There will be management fees that are charged for the running of the fund.
• Advisor fees: An advisor will offer services and guidance. This usually includes both an initial fee and an ongoing annual fee.

Let’s have a look at an example to show the effect of fees. We will assume the following information for this example:

• Starting capital: R7 million
• Investment period: 25 years
• Gross annual return: 10%
• Inflation rate: 5% per annum
• Annual drawdown rate: 4% of the opening value each year

Scenario 1 - 0.86% Fees: After 25 years, the living annuity would have an estimated inflation-adjusted value of around R7.5 million.

Scenario 2 - 3% Fees: After 25 years, the living annuity would have an estimated inflation-adjusted value of around R4.4 million.

We can see how even a slight difference in the fee percentage can lead to significant differences in retirement outcomes. This example is for illustrative purposes only and real results may vary. If you are interested in finding out more about fees, this article is very insightful. At 10X, we offer fees that are clear, transparent and low-cost. You can be sure that there are no hidden costs. Fees charged on your living annuity will usually be 1% or less, depending on the amount invested. Please see our fund page for more information on our living annuity fees.

Rule 9: The golden equation is a planning lens

The golden equation is not a guarantee, but it may be a good way to think about the long-term sustainability of your living annuity. The golden equation is as follows:

Drawdown rate + fees + inflation ≤ investment returns

Your investment returns ideally need to cover your drawdown rate, fees, and inflation. Drawdown rate is the percentage of the annuity value drawn as income each year, fees may impact the returns you have available to reinvest, and inflation is the rising costs of goods and services that may impact the purchasing power of your money.

How 10X can support living annuity planning

At 10X, our aim is to help you understand your options for fund selection, fees, income options, and more. Our funds are carefully chosen to include a range of different asset classes, so you are able to choose a fund that best suits your investor profile and long-term financial goals. We make use of an index-based investment strategy coupled with a more active approach to asset allocation. Our fees are kept low and transparent so it is clear to you, as an investor, what you are being charged.

You will also have access to a range of free online tools on our website, such as the EAC calculator. These tools can be useful for scenario planning. Our efficient 10X investment consultants are also available to chat through your options with you, should you need any further assistance.

Final thoughts on living annuity rules

When planning your living annuity and retirement, it's best to start early, before your retirement date, to account for all influencing factors. While your living annuity provides flexibility, managing it requires careful attention to sustainability, taxes, fund choices, drawdown rates, fees, and beneficiary nominations.

If you need extra support with preparing for retirement, contact the knowledgeable 10X investment consultants; we're ready to assist with any retirement queries you may have.