Living Annuities: Who They Actually Suit, and When a Guaranteed Income Makes More Sense

A living annuity is the more popular of the two main ways to turn retirement savings into an income, and for good reason: you keep control of the underlying investments, you choose how much to draw each year, and whatever is left when you die can go to your family rather than disappearing into an insurer’s risk pool. That popularity, though, has outpaced how well-suited the product actually is to the average retiree. The Actuarial Society of South Africa has gone on record saying most retirees would be better off with a guaranteed or hybrid annuity instead. This article sets out honestly who a living annuity genuinely suits, how age and health change that answer, how buying a guaranteed annuity with part of your capital fits into the picture, and the practical levers that actually improve the income you draw from one.

What a Living Annuity Actually Is

When you retire, the compulsory two-thirds of your pension, provident fund, or retirement annuity proceeds can go into a living annuity instead of a guaranteed annuity. The capital stays invested, in unit trusts or other funds you select, and each year on your policy anniversary you choose a drawdown rate, legislated between 2.5% and 17.5% of the remaining balance. There’s no insurer absorbing investment or longevity risk here; both sit with you. If investment returns run ahead of what you draw out, your capital can grow. If they don’t, it shrinks, and nothing stops you from drawing it down to zero if you live long enough or draw too aggressively. We’ve covered the mechanics of this in more depth in our guide to living annuities; this article focuses specifically on suitability, timing, and the decisions that move your income.

Who a Living Annuity Actually Suits

According to the Actuarial Society of South Africa, living annuities work best for a fairly specific profile of retiree, not the general population that currently defaults into them. The characteristics that make someone a genuinely good fit include:

• Having enough capital that your required income sits comfortably below what the annuity can sustainably produce, giving you margin to absorb bad investment years without panicking or running short
• Being financially sophisticated yourself, or having an ongoing relationship with a financial adviser you trust to help manage fund selection and drawdown rate over time, not just at the point of retirement
• Wanting to leave a residual estate to your family, since whatever capital remains in a living annuity at your death passes to your nominated beneficiary; a guaranteed annuity, by contrast, generally pays nothing to anyone unless you specifically paid for that feature
• Having a shorter life expectancy due to a health condition, in which case the longevity protection a guaranteed annuity offers matters less, and the flexibility of a living annuity matters more

Where this gets honest and slightly uncomfortable: if none of the above describes you, particularly if your capital is modest relative to your income needs or you have no appetite for ongoing investment decisions, the research suggests you are statistically more likely to be better served by a guaranteed life annuity, or a hybrid of the two. That’s a harder thing for an adviser to recommend than simply defaulting a client into a living annuity, which may be part of why the actuarial profession keeps having to say it publicly. We’ve covered the guaranteed annuity side of this in full in our guide to guaranteed annuities.

What Age Is the Latest You Should Start One?

There’s no legislated maximum age for starting a living annuity in South Africa. You can begin one well into your seventies or eighties if that’s when you retire or transfer in. The more useful question isn’t a legal one, it’s a practical one: at what point does the responsibility a living annuity demands stop matching your capacity to carry it?

Two things work against starting, or relying solely on, a living annuity very late in life. The first is cognitive risk: the older you are, the higher your statistical risk of cognitive decline or dementia, exactly the condition under which ongoing investment decisions and annual drawdown reviews become hardest to manage well, whether by you or by family members suddenly having to step in. The second is less obvious and more interesting: research modelling guaranteed annuity purchases found that it does not pay to delay buying one until later in retirement, because you lose out on the compounding value of mortality credits, the subsidy guaranteed annuities draw from pooling longer-lived and shorter-lived annuitants together, which builds up more value the earlier you lock it in. In other words, “I’ll keep my money flexible in a living annuity for now and buy a guaranteed income later, when rates might be better” is a more expensive plan than it sounds.

The industry’s current answer to this isn’t a hard age cutoff, it’s a staged approach to retirement income. Think of retirement as roughly three phases: an active phase where spending is often higher and some flexibility helps, a stabilising phase where spending patterns settle and it’s worth reviewing your drawdown rate down if you can, and a later, capital-preservation phase where the priority shifts to certainty and simplicity, often alongside rising healthcare costs. Rather than picking one age to switch everything over, the more robust approach is to build in a guaranteed income floor earlier, covering your essential expenses, and let a living annuity carry the discretionary portion and whatever growth potential you want to keep chasing. If you do intend to keep managing a living annuity into advanced age, it’s worth formalising who takes over the decisions if you’re no longer able to, through a trusted adviser mandate or a family member with power of attorney, before it becomes necessary rather than after.

Buying a Guaranteed Annuity With a Lump Sum: The Blending Strategy

You’re not limited to choosing one product at retirement, and this is probably the single most underused lever available to improve a retirement income plan. You can use part of your compulsory annuitisation capital to buy a guaranteed annuity for a lifetime income floor, and leave the rest in a living annuity for flexibility and growth. Actuarial research on this comparison found that blending the two doesn’t just reduce risk, it actually produces a higher overall income and meaningfully better odds of still having something left for your family, compared with relying on a living annuity alone at a similar risk level.

It’s worth knowing that this isn’t a decision you’re locked into making only once, upfront. You can start with a living annuity and switch some or all of it into a guaranteed annuity later on; what you cannot do is go the other way, a guaranteed annuity can’t later be converted back into a living annuity. That one-way door, combined with the mortality-credit point above, leads to a fairly clear practical conclusion: decide what minimum guaranteed income you want as a floor, and buy at least that portion sooner rather than later, treating any additional annuitisation down the line as a top-up on a plan you’ve already locked the core of, rather than a decision you keep deferring in the hope of a better rate.

Other Factors That Actually Improve Your Income

Beyond the big structural decision of living versus guaranteed versus blended, several smaller, controllable factors have an outsized effect on how long your money lasts and how comfortable the income feels.

Your Drawdown Rate, Honestly Assessed

The legislated range is wide, 2.5% to 17.5%, but wide legal limits aren’t the same as wise ones. Industry guidance from ASISA points to drawdown rates of 4% to 5% in the first decade of retirement as prudent, rising to a level still below 8% in later years, as the range most likely to preserve your purchasing power for life. The uncomfortable statistic here is that the average South African living annuitant actually draws down at around 6.6% a year, above what most prudent guidance recommends, and that figure was already the lowest it had been in five years when last measured. If your own drawdown rate sits meaningfully above 5% in your first decade of retirement, it’s worth an honest conversation with your adviser about whether that’s sustainable or simply what feels comfortable right now.

The Golden Equation

A useful way to think about sustainability: your drawdown rate, plus your fees, plus inflation, needs to stay below your investment return, or your capital is mathematically guaranteed to erode over time. Every one of those four variables is at least partly within your control except inflation, which makes the other three, how much you draw, what you pay in fees, and how your portfolio is positioned, the real levers.

Fees, and the Freedom to Shop Around

Because living annuities fall outside Regulation 28, unlike the retirement annuity or pension fund you contributed to before retiring, you have full freedom over the underlying investments, including the option to go up to 100% offshore if that suits your goals. That freedom cuts both ways: it lets you build a lower-cost, more diversified portfolio than Regulation 28 would have allowed pre-retirement, but it also means nothing stops you from chasing returns into an unbalanced or expensive portfolio if you’re not disciplined. Over a 25 to 30 year retirement, the difference between a 1% and a 2% annual fee compounds into a genuinely large amount of lost income. If you’re unhappy with your provider’s fees or fund choices, you can move your living annuity to a different provider under Section 37 of the Pension Funds Act without triggering income tax or capital gains tax, provided the money stays within the retirement system and the withdrawal rules carry over. Some providers charge their own administration costs for this, so it’s worth checking both ends before switching, but the tax-free part of this is a real and underused lever.

Reviewing, Not Setting and Forgetting

Treat your drawdown rate as something to revisit every year at your policy anniversary, not a number you set once at retirement and leave alone for decades. Spending patterns genuinely change across retirement, often higher in the active early years, settling in the middle years, and shifting toward healthcare and certainty later, and your drawdown rate is one of the few things you’re free to adjust annually to match.

Key Takeaways

• Living annuities genuinely suit retirees with capital to spare, financial sophistication or good ongoing advice, a wish to leave an estate, or a shorter life expectancy; most other retirees are statistically better served by a guaranteed or blended option
• There’s no legal maximum age to start one, but cognitive decline risk and lost mortality-credit value both make relying solely on a living annuity later in life a progressively harder case to make
• Blending a guaranteed annuity with a living annuity can produce both a higher income and better odds of leaving something to your family than a living annuity alone
• You can move from a living annuity into a guaranteed annuity later, but never back, and delaying that move generally costs you mortality-credit value rather than earning you a better deal
• A prudent drawdown rate sits around 4% to 5% in your first decade of retirement; the average South African retiree draws around 6.6%, above what most guidance recommends
• You can switch living annuity providers tax-free under Section 37 if fees or fund choice disappoint, a genuinely underused way to improve your net income

Frequently Asked Questions

Who should probably avoid a living annuity?

Retirees with relatively modest capital compared to their income needs, little appetite or support for ongoing investment decisions, or a long life expectancy with no other guaranteed income are, according to actuarial research, statistically more likely to be better served by a guaranteed or hybrid annuity instead.

Is there a maximum age to start a living annuity?

No legislated maximum exists. The practical concern isn’t a legal limit; it’s that cognitive decline risk rises with age, and the ongoing management a living annuity requires becomes harder to sustain well the later in life you rely on one without any guaranteed income floor.

Can I switch my living annuity to a different provider if I’m unhappy with the fees?

Yes. Under Section 37 of the Pension Funds Act, you can transfer a living annuity to another registered provider without triggering income tax or capital gains tax, provided the funds stay within the retirement system and the same withdrawal rules carry over. Check both providers’ administration costs for the move itself.

Can I convert my living annuity into a guaranteed annuity later?

Yes, this is allowed and is a common part of a blending strategy. The reverse isn’t possible though; a guaranteed annuity cannot later be converted into a living annuity, which is worth factoring into how much you commit to each upfront.

What’s a safe drawdown rate for a living annuity?

Industry guidance points to roughly 4% to 5% in the first decade of retirement as prudent, potentially rising toward, but staying below, 8% in later years. The legal range allows up to 17.5%, but drawing at that level carries a real risk of depleting your capital well before the end of a long retirement.

Get Advice Before You Decide

The choice between a living annuity, a guaranteed annuity, and a blend of the two has a permanent effect on your retirement income, and in the case of a guaranteed annuity, it’s effectively irreversible. We strongly recommend working through this decision with an authorised financial planner, ideally one who will show you a genuine comparison between living, guaranteed, and blended options rather than defaulting you into whichever product they’re most used to selling.

This article was researched and drafted with the assistance of AI tools, using the sources credited in the production notes below, and reviewed for accuracy before publication. Drawdown rate guidance, average statistics, and regulatory thresholds change over time and depend on your personal circumstances, health, and capital. This is general information, not personalised financial advice; please speak to an authorised financial planner before choosing or changing your retirement income structure.