The Hybrid Annuity Combining a living annuity and a life annuity

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Upon retirement, you will have to make a key decision regarding whether to purchase a life annuity or a living annuity. A common concern for many retirees is the need to balance their retirement income certainty with both investment growth and flexibility. Remember, your annuity serves as your source of income for your retirement years.  

A life annuity, which can also be called a guaranteed annuity, offers stability, whereas a living annuity offers flexibility and potential investment growth. In order to take advantage of both kinds of annuities, you may be considering a hybrid approach, where you divide your retirement savings and make use of both types of annuities.  

While not as common as you may think, hybrid annuity strategies are becoming increasingly popular in South Africa. In this article, we will delve deeper into this approach, looking at the pros and cons of each, the challenges of a hybrid strategy, as well as covering some practical examples. 

Understanding the two core annuity types  

When planning for retirement, you’ll need to make important decisions about how to convert your savings into a consistent income stream. Broadly, annuities fall into two main categories, namely: life annuities and living annuities.  

What is a life (guaranteed) annuity? 

A guaranteed annuity is purchased from an insurance company and provides you with a fixed income for the rest of your life. Once purchased, the income is guaranteed, giving you certainty and stability regardless of market fluctuations. You can select either a fixed income or an inflation-linked income when purchasing your life annuity, but you will not have any control or flexibility in terms of investment portfolio choices or income adjustments after the initial purchase. 

The residual value of a guaranteed annuity cannot be passed on to a beneficiary, as, upon your passing, the capital is retained by the insurance company. A life annuity provides a fixed, predictable income, thereby minimising the stress of market volatility and the potential impact on your income. There is also no longevity risk associated with a life annuity, as it will provide you with an income for life, thereby eliminating some of the financial stress of retirement.   

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What is a living annuity? 

A living annuity, on the other hand, is a flexible investment product, allowing you to draw an income while your savings remain invested, where they can potentially grow and compound over time. Living annuities offer considerable flexibility: you can make adjustments to your underlying investment portfolio and have the freedom to decide on your drawdown rate every year, which can range from 2.5% to 17.5%. A big part of the appeal is the ability to pass on the remaining capital to your beneficiaries outside of your estate, and therefore, tax-free.  

While the flexibility of living annuities is appealing, it does come with risks. The income from a living annuity is not guaranteed and subject to market performance, which means there is both investment risk and longevity risk to think about; the possibility that your savings may not last throughout retirement.  

As such, living annuities need to be carefully managed. The responsibility to properly manage the living annuity lies with you, the investor. 

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Why the choice is difficult 

Choosing between the two annuities can be a tough decision, as each comes with its own advantages and drawbacks.  

A life annuity removes the stress of outliving your savings and provides a guaranteed income, but it comes with limited flexibility, and you cannot pass it on to your beneficiaries. A living annuity, on the other hand, provides growth potential, investment control and the ability to pass on wealth to beneficiaries tax-free, but exposes you to market fluctuations and the risk of depleting your savings. 

The choice you make should come down to personal circumstances, such as your financial goals, risk tolerance, investment knowledge, and retirement goals. Do you want security, or would you prefer flexibility? Today, more and more retirees are opting for a hybrid annuity strategy, which involves combining the two types of annuities.  What is a hybrid annuity strategy? A hybrid annuity strategy is when you invest your retirement savings in both a life annuity and a living annuity, thereby taking advantage of the positive aspects of both products.

The life annuity provides the stability and predictable income, while the living annuity provides the flexibility, legacy planning and potential for investment growth. This approach provides balance, offering the opportunity for potential investment growth while also offering some financial stability.  

Key benefits of a hybrid annuity strategy 

The key benefits of a hybrid annuity strategy include:  

• Guaranteed income security: The life annuity can provide peace of mind by providing guaranteed capital for expenses you must cover each month, such as your medical aid. 
• Flexibility and growth potential: Your living annuity capital will remain invested, providing opportunity for potential growth. You will also have flexibility in terms of your annual drawdown rate and frequency, as well as your fund selection.  
• Inflation protection: When structuring your life annuity, you can choose an inflation-linked structure, while your living annuity can also be structured with inflation-outperformance in mind by including equities in your portfolio. Bear in mind though, that formal inflation numbers presented by the government might not stack up with inflation you experience – your medical aid expenses, for example, might increase by more than the formal inflation number. 
• Legacy planning: Any residual value in your living annuity may be passed on to your beneficiaries outside of your estate and, therefore, tax-free.  
• Behavioural comfort: A predictable and stable income offered by a life annuity provides a layer of comfort, giving you a sense of ease. This often means fewer emotional decisions are made regarding the living annuity.  
• Customisation: The living annuity provides freedom and flexibility, allowing you to structure it according to your investor profile, focusing on your risk tolerance levels, investment timelines and financial goals. 

Challenges and risks While a hybrid annuity strategy can provide you with a sense of security in retirement, there are several challenges and risks that you’ll need to keep in mind before committing your savings, including:  

• Complexity: Living annuities require regular monitoring and reviewing. You’ll need to regularly review your portfolio performance and income drawdowns to ensure your capital lasts throughout retirement.  
• Liquidity risk: Once you have purchased a life annuity, it cannot be converted into a living annuity, and you will have no access to that cash lump sum again. As such, it is crucial that you are confident about your choice.  
• Inflation mismatch: Fixed-income life annuities may not keep pace with inflation, which would potentially reduce your real purchasing power over time. Even formal inflation-linked annuities may struggle to match your lived experience of inflation over time.  
• Fee transparency: Hidden and high fees can reduce your retirement savings over time, especially in living annuities where investment growth is key.  
• Longevity assumptions: Careful consideration should be given to longevity when deciding on the split of your savings between a living and life annuity. 

The major role of fees   

Fees can play a major role in your retirement outcomes, and should be minimised as much as possible. With a hybrid annuity strategy, minimising fees is essential, especially for your living annuity, as growth potential is key, and high fees disrupt this.   

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High fees may have the effect of reducing the available returns to be reinvested and allowed to potentially compound over time. Lower fees may mean that there are more returns to be reinvested and allowed to potentially grow over the long term.   

Let’s look at an example which shows fees of 0.86% compared with fees of 3%.  We will assume the following information for our example: 

• Investment amount: R5 million  
• Investment period of 25 years 
• Drawdown rate: 4% (made as an annual payment) 
• Return of 12% per annum 
• An inflation rate of 6% 

Example 1 (0.86% Fees): Real investment value is approximately R5.89 million. 

Example 2 (3% Fees): Real investment value is approximately R3.62 million.  

As you can see, a relatively small difference in fees can have a significant impact on the investment value of your annuity, especially when compounded over the long term, such as 25 years. Note that this example is for illustrative purposes only, and real results may vary. You can learn more about fees here.   

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The Effective Annual Cost (EAC) is the annual cost of owning an investment over a one-year period of time. This metric was introduced by ASISA in 2015. All factors being equal, a higher EAC may mean that there are fewer returns available to be reinvested and potentially grow and compound over time. A lower EAC may mean that there are more returns available to potentially compound and grow over time. The EAC would be just one factor to consider when comparing and evaluating service providers.  

The EAC will usually include the following fees: 

Administration fees: The fees that are deducted for administration-related tasks. These are tasks such as compliance, reporting or tax.  

Advisor fees: These are the fees charged by advisors. They may charge both an initial and an ongoing fee for their services and advice. 

Management fees: These are the fees charged for the management of the fund. 

Other fees: There may be other costs, such as exit fees, applicable to certain products.  

At 10X, we offer a low-cost, transparent fee structure with no hidden costs. It is simple and straightforward for investors to understand. Fees of 1% or less are charged on most products, depending on the product chosen and the amount invested. To find out more about our fee structure, feel free to explore our products.  

Asset allocation for the living annuity component  

As mentioned, a living annuity offers flexibility in terms of the underlying assets in which it is invested. As an investor, you always want to consider your risk profile, financial goals and investment timelines when evaluating your asset allocation. Asset allocation plays the biggest role in the performance of your living annuity, accounting for over 90% of returns, as seminal research fromBrinson, Singer and Beebower shows. 

This asset allocation is usually a mix of equities, bonds, real estate (property) and cash. As someone using a hybrid annuity strategy, you’ll generally want to ensure that you are not too heavily invested in cash or bonds, as you want to aim for growth, which would allow for potential inflation-beating returns.  

With 10X, you have the freedom to customise the underlying portfolio of your living annuity by choosing from a selection of carefully curated funds, each with a different mix of assets and geared towards a different investor profile.  

Equities are the most volatile of the asset classes, but they are also most likely to generate the best returns over the long term. As data suggests, 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), although past performance doesn’t guarantee future results.  

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Bonds are far more stable and will add stability to a portfolio, but they are likely to generate lower returns than equities. Real estate may also generate some good returns, but it is not as stable as bonds or cash. Cash is the most stable of the asset classes, but likely to generate the lowest returns of all.  

Diversifying across the different asset classes allows you to spread your risk and take advantage of any growth in certain asset classes. You also have the option of investing some or all of your capital offshore. Living annuities are not subject to Regulation 28 of the Pension Funds Act and, therefore, there is no limit on offshore investments. Investing offshore may provide a good hedge against any local market instability that may occur in South Africa, while adding some protection against any depreciation of the Rand. 

At 10X, we offer you a range of carefully selected funds with a diversified asset allocation. We understand the importance of staying invested, keeping fees low and diversifying your portfolio, and this is reflected in our fund choices. These funds all aim to suit a range of different investor profiles, therefore meeting the needs of investors with different time horizons, risk profiles and financial goals. To find out more about our fund information, please visit our funds page. Fund information is correct as of the 17th of October 2025. 

How 10X supports a sustainable hybrid strategy  

By allocating a portion of your retirement savings to a living annuity, you gain the ability to maintain investment control, adjust your drawdown rate, and potentially grow your savings over time, all while enjoying the stability of your life annuity.   

Our transparent, low-cost living annuity allows for 100% offshore exposure, making it a popular choice amongst investors. On top of that, our online platform is easy and intuitive to use, letting you view statements and make adjustments quickly and effortlessly. 

From an investment strategy perspective, we make use of an index tracking investment strategy with a more active approach to asset allocation, while focusing on achieving the long-term returns our clients deserve. You can learn more about our investment strategy here.  

Final thoughts on hybrid annuity strategies  

As a retiree, you don’t need to feel forced to choose between income stability or investment flexibility and growth; there is an approach where you can incorporate both as a part of your strategy. This could provide you with stability, longevity, flexibility and peace of mind when properly handled 

Continuing to focus on the basics, such as low fees, strategic asset allocation and using a reliable and transparent service provider who aims for superior returns, such as 10X, can help to ensure that you stay on track and ultimately, you achieve your retirement goals.  

If you decide on a hybrid approach and need help structuring your living annuity, please get in touch with the 10X investment consultants, who will be more than happy to give you the facts of the process.