Avoid drawing too much from your living annuity in retirement

As retirement approaches, many investors are faced with a myriad of investment vehicle decisions. Picture: Independent Newspapers.

As retirement approaches, many investors are faced with a myriad of investment vehicle decisions. Picture: Independent Newspapers.

Published Apr 16, 2024


By: Brett Mackay

Instead of cashing out all your retirement savings in a lump sum, living annuities allow you to draw down a monthly income, which protects your capital and allows the bulk of your money to keep growing over the long term.

As retirement approaches, many investors are faced with a myriad of investment vehicle decisions that can be daunting to navigate. From determining the right retirement income stream to ensuring tax efficiency and long-term sustainability in consideration of inflation and compound interest, the choices can feel overwhelming.

In some cases, it is possible to cash out the entire retirement savings you have saved over your working career to use that to fund the rest of your living years. Yet, being able to cash out the bulk of your retirement investments at 65 can create a false sense of security as the value could be perceived as high, which makes it tempting to spend too much of the cash too soon.

It’s important to keep in mind that many people are living longer nowadays, which means their money needs to stretch longer. The World Health Organization say 73 is the average age of death in 2019, an increase of more than six years, from 66.8 years, in 2000.

In theory, by the time you retire, the bulk of your debt, such as a bond and car, should be paid off, meaning you need less per month to still live in comfort. Unless you live way beyond 14 years after the official retirement age of between 60 and 65, which is a possibility and therefore requires careful planning.

A stable solution

One way to get the most out of your investments and sweat this asset is to draw down what can be viewed as a monthly salary, leaving your capital to continue growing. This is a living annuity, into which your retirement savings are paid. This also means that the bulk of your money gains at a tax-free rate, although what you cash out monthly will be taxed as if it were a monthly income.

According to the Association for Savings and Investment South Africa (Asisa), South African retirees had R625.9 billion of their retirement savings invested in living annuities at the end of 2022, which marks an increase of 47.3% from the R424.8bn invested in living annuities at the end of 2018.

Living annuities offer the choice of pulling out between 2.5% and 17.5% of your fund’s value each year, with the option of an upfront payment, or quarterly, bi-annually or monthly payment.

However, you still need to plan carefully and take the advice of a financial planner because the lump sum still invested needs to last as long as possible. At the same time, if you pull out the maximum of 17.5% each year, the value of your capital will be eroded.

It’s also vital to consider fees when setting up a living annuity. According to the 10X Retirement Reality Report, 37% of South African surveyed respondents don’t know how much they pay in fees towards their retirement annuities. Furthermore, 13% believed that the fee depended on performance; while 13% believed they were not being charged at all.

Over the long term, high fees significantly erode your investment growth. Living annuities are not considered part of the deceased estate as long as there are nominated beneficiaries – which allows the investment to go directly to loved ones named as heirs. Your heirs have the option of taking the living annuity investment out as a lump sum or continuing to draw down monthly, but they need to bear tax implications in mind.

Living annuities are the best way of ensuring that your investment works and grows for you. After all, there’s no point in having money if it doesn’t provide long-term financial security. Reap the rewards of a sound retirement plan after you stop working full-time by continuing to grow your money, and take current factors into account.

* Mackay is a consultant at 10X Investment.