Why living annuities feel riskier than they really are

As a retiree with a living annuity, you may find yourself checking your investment statements regularly, watching the markets very closely or feeling concerned about your financial stability and the longevity of your annuity. Living annuities can feel riskier than they actually are, so it’s important to distinguish between emotional discomfort and genuine financial risk.

In this article, we will take a closer look at the fear surrounding living annuities, why this fear exists, as well as tools that you can use to help you manage this risk, such as asset allocation, low fees, a sensible drawdown rate and a disciplined approach to your investment.

Understanding living annuities

Living annuities are long-term investment vehicles designed to keep your capital invested while you, the retiree, draw income from the investment. Living annuities offer flexibility when it comes to your drawdown rate and the funds you choose to invest in, both of which can be changed. Your drawdown rate refers to the percentage of the total value of your living annuity that you draw as income.

This rate can be amended at the policy anniversary date each year. Your selected drawdown rate can be from 2.5% to 17.5% per annum. You can also select the frequency of payment. This could be annually, biannually, quarterly or monthly. Your fund selection can be amended in order to cater to your changing needs over time. 10X offers a variety of different funds that you can select from, each suited to different investor profiles.

Your living annuity is funded by your retirement savings, which are transferred to your annuity upon retirement. In South Africa, the retirement age is 55 years of age, but many continue to work for much longer.

Why retirement changes how we experience risk

The emotional context

With retirement, there is an emotional component to consider. Instead of receiving a predictable, regular salary each month, you are now drawing an income from your living annuity capital. Any losses in value that you notice when checking your annuity statement can affect you emotionally, as you may fear for the sustainability of your annuity over the long-term. And as you are not adding any further contributions to your annuity, but are instead withdrawing an income from this capital, it can also feel daunting. Often, this can lead investors to have knee-jerk, emotional reactions, and they may make decisions in the moment that they later come to regret.

Behavioural bias

Behavioural bias can also play a role. This refers to the irrational behaviour that we might see displayed by people when it comes to their finances. Rather than acting logically, investors may be influenced by emotions and mental shortcuts, which can lead to decisions that are not in their long-term best interests.

Examples include recency bias, where recent events are given too much weight; inertia, where people avoid making changes; and loss aversion, where the fear of losses outweighs the potential for gains. Recognising these biases can help you make more balanced and informed financial decisions.

The visibility problem: Why living annuities feel exposed

Perceived risk vs actual risk

Living annuities often feel riskier and more vulnerable than they actually are. When you check your statement, you can see your drawdowns, the performance of your living annuity and more. This transparency can add to your anxiety, but it should not be seen as a risk; rather, something that you can use to help with your decision-making as you move forward, a tool that can actually aid your long-term decision-making.

In comparison, a life annuity or guaranteed annuity may seem less risky as your income is guaranteed for life and not subject to market volatility. It is purchased from an insurance company, so the risk lies with the insurance company, with this risk included in the price paid when purchased. A life annuity provides no control or flexibility in terms of portfolio choices or income adjustments after the initial purchase.

A huge part of a living annuity’s appeal is the ability to pass on the remaining capital to your beneficiaries outside of your estate, which will be tax free. A life annuity offers no capital payout to beneficiaries and will cease upon your death.

The real risks retirees should worry about

There are a few real risks that should be kept in mind when it comes to managing your living annuity. Let’s have a look at these in some more detail:

Inflation risk

Inflation risk is a very real and inevitable risk. It has the effect of reducing the purchasing power of your money. In other words, the bag of goods and services that you are able to buy with a certain value of money gets smaller over time. Inflation in South Africa is usually between 4% and 5% p.a., so this needs to be carefully considered when it comes to managing your living annuity.

Longevity risk

This is the risk that your money will run out too soon and that there will not be enough savings to provide for you in your retirement years. Your living annuity is considered a long-term investment, so this also needs to be factored in when it comes to the structure of the underlying portfolio.

Behavioural risk

Behavioural risk is very common. A market crash may result in investors looking to panic sell or switch from more assets with a perceived higher risk profile, such as equities, into more stable assets, such as bonds. This may then result in underperformance of your living annuity in the long run.

Fee risk

Fees can play a role in the potential growth of your living annuity. It’s important that you are aware of the fees that you are paying and that you monitor these costs regularly. High fees may have the effect of reducing the returns available to be reinvested, and therefore, there may be fewer returns available to grow and potentially compound over time.

Asset allocation: Why growth assets reduce risk over time

Asset allocation also plays a vital role in your living annuity. As mentioned, living annuities offer flexibility, which allows you to select the underlying assets where your capital will be invested. The assets that you will select from are usually the following: equities, bonds, real estate and cash. Your selection should align with your investor profile and long-term financial plan and goals, and this can be amended in order to meet any changing needs or requirements. At 10X, you can choose from a range of carefully curated funds, each with a different mix of assets and geared towards different investor profiles.

Asset allocation plays the biggest role in the performance of your living annuity, accounting for over 90% of returns, as seminal research from Brinson, Singer and Beebower shows. Cash is the most liquid and stable of the asset classes, while also likely to produce the lowest returns. Bonds are stable but may also produce lower returns; this is not to say that bonds will never outperform what’s expected, but they are typically seen as a more conservative option. Real estate can also produce strong returns, as well as provide a good hedge against inflation. Equities may be volatile, but are likely to produce the best returns. 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), but past performance does not guarantee future results.

The natural inclination may be to go more conservative with your asset allocation as a retiree, but generally, you want to include some equities in your portfolio, as these are likely to generate the best returns in the long term. This may then allow you to potentially beat inflation and hopefully grow your capital after fees and drawdown rate have been deducted. Remember, your retirement years are likely going to be anywhere from 10 to 30 years or more, and your savings will need to last.

10X offers a range of different funds for investors to select from. These funds are diversified across the different asset classes and can include both local and offshore assets. While some providers have limits, at 10X, a living annuity can be invested 100% offshore, if this is your preference. Investing offshore can provide good opportunities for investors in the international market, while also offering a good hedge against local market volatility and any depreciation of the Rand. Diversifying across the asset classes can help spread your risk while also balancing risk and reward. In other words, you are not putting all of your eggs in one basket, which may then reduce your potential risk.

As your savings are invested in the market, any market volatility can have an effect on your annuity. Of course, this may then have a knock-on effect when it comes to the income that you receive. For example, if your living annuity experiences a drop in value, you will then receive less income (if your drawdown percentage remains unchanged) for that particular income payment as your drawdown rate is a percentage of the total value of your living annuity.

You can find out more about the 10X funds on offer on our website. Please visit our funds page for the most up-to-date fund information.

Why fees amplify risk more in a living annuity

A small difference in fees can have an impact on the long-term growth of your living annuity, especially when this is compounded over the long term.

Some of the fees that you might see charged are as follows:

Administration fees: These are the fees charged for the administration of the fund. This will be for tasks such as reporting, tax and compliance.

Advisor fees: An advisor will charge for their advice and services. There may be both an initial and an ongoing fee charged.

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

Let’s look at an example to help show the effects of fees, especially when this is compounded over time.

We will assume the following for this example:

• Investment amount: R2 million
• Investment period of 25 years
• Drawdown rate: 4% (assuming an annual payment)
• 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.

This example is for illustrative purposes only, and actual results may differ. Learn more about how fees impact retirement outcomes here.

The Effective Annual Cost (EAC) is an important measure that was introduced by ASISA in 2015 that illustrates all the fees that you’re paying per year for your investment. This standardised metric allows you to compare the EAC of your provider with other providers, allowing you to evaluate the different service providers. All factors being equal, you may find that a higher EAC means that there are fewer returns to be reinvested and allowed to compound over time. A lower EAC may mean that there are more returns available to be reinvested and allowed to compound over the long term. The EAC of your investment would be just one consideration when evaluating service providers. You can find your EAC on your investment statement.

At 10X, we offer an EAC calculator. This handy tool is a part of our free online resources that are on offer to clients. Our fees at 10X are cost-effective and simple to understand, and you’ll never have to deal with hidden costs. Please explore our products for the most up-to-date fund information on specific products.

How structure turns fear into confidence: Our strategy

Taking a structured and disciplined approach to investing can really reduce fears when it comes to investing and your retirement. Making use of a long-term financial plan and sticking to this plan can take a lot of the uncertainty out of the equation. An unstructured approach can lead to overthinking, market watching and too many decisions that may not need to be made. When thinking about a structured investment approach, you would consider the following: asset allocation, and long-term goals and objectives, with less focus on any short-term market noise.

At 10X, we like to keep things simple, diversified and transparent while focusing on long-term excellent returns for our clients. We keep costs low, allowing for more of your returns to be reinvested and potentially provide good compound growth in the long-term. Our index tracking investment strategy looks at consistency and removes emotion from the decision-making process. This strategy may also be more cost-effective as it involves fewer research and trading activities, which may mean fewer fees passed onto you, as the investor. Alongside our index-tracking investment strategy, we take a more active approach to asset allocation, helping to ensure we can achieve the long-term returns our clients deserve.

As data from the SPIVA Scorecards suggests, index tracking may outperform active management most of the time. According to the latest SPIVA South Africa Scorecard (as of 30 June 2025), 67.61% of South African actively managed equity funds underperformed the S&P South Africa DSW Capped Index over the ten-year period ending 30 June 2025. Find out more about our investment strategy.

Final thoughts on living annuities and risk

While it is natural to feel anxious and worried about your living annuity, much of the risk that you’re feeling may be overstated. It is important to remember that your focus needs to be on factors such as your drawdown rate, the sustainability of your living annuity, your asset allocation, fees and inflation. With the right service provider and investment strategy, you can achieve great retirement outcomes.

Knowing where to focus can be powerful and can help to minimise anxiety. Reducing fees, selecting a sensible drawdown rate and taking a structured approach to your asset allocation can help mitigate some of the risk involved.

At the end of the day, your living annuity should be designed to work for you over the long-term. Please don’t hesitate to get in touch with the helpful and experienced investment consultants at 10X for any queries. Simplify your retirement investments with 10X today!