The questions you should be asking about a living annuity

Question

I will be retiring shortly and am looking at buying a living annuity. I was told that the main item to consider would be costs. The plan I am looking at has an administration fee of 0.35% and an investment fee of 0.4%. Is this good?

Answer

An admin fee of 0.35% and an investment fee of 0.4% gives you a total investment cost of 0.75% per year before advice fees. In today’s market, that is competitive.

However, the investment fee is a bit of a red herring, as investment returns are published after the management fee has already been deducted. You should focus on the returns and volatility of the investment portfolio in addition to the cost of the investment, as these are the variables that actually determine whether your retirement works.

A living annuity is an income machine that must support you for the rest of your life. These days, retirement can easily stretch to 35 years, so investing for it cannot be casual or reactive. It requires a robust, carefully constructed investment plan – one that balances growth and stability, manages risk deliberately and is designed to withstand decades of uncertainty.

In retirement, volatility matters more than it did during your working years. When you were accumulating capital, market declines were uncomfortable but temporary. You could wait for recovery. In retirement, you are withdrawing income at the same time. If markets fall sharply and you continue drawing income, you are selling assets at depressed prices. The capital is gone permanently. This is known as sequence-of-returns risk, and it can quietly derail an otherwise sound retirement plan. So, ask yourself:

• How did this portfolio behave during previous market corrections?
• Could you tolerate a 20% decline in your capital while still drawing income?
• Is there a lower-volatility component to protect near-term income needs?

A sensible living annuity strategy uses a layered approach, with part of the portfolio in lower-volatility assets to fund short-term income, and another part in growth assets to drive long-term inflation-beating returns. This reduces the risk of being forced to sell growth assets during market stress.

Finally, we return to costs – but in context. The table below compares the returns on a hedge fund and an index tracker fund. At first glance, the hedge fund would immediately be dismissed. A 7.6% fee versus 0.4% looks excessive, even reckless.

But the key point is that the returns shown are declared after fees have been deducted. The real comparison is not about cost in isolation. It is about net returns and risk.

For the long-term growth portion of your portfolio, the index tracker makes sense. Over decades, the strong years (like +52%) can compensate for the weak years (like -18%). Volatility becomes tolerable when time is on your side.

Retirement changes the equation. If you are drawing an income and your portfolio delivers -18% in a year while you are simultaneously withdrawing 5% or 6%, the damage compounds. You are selling units when prices are depressed, which creates sequencing risk and destroys retirement plans.

In this context, the hedge fund’s smoother return profile (worst year +6%) works for the income-producing portion of the portfolio. Stability suddenly has real value. The conversation shifts from “What is the cheapest fund?” to “What combination of return and risk gives me the highest probability of my money lasting?”

The real questions you should ask are:

• Is my drawdown rate realistic given my age and capital?
• Does my portfolio have the right balance between growth and stability?
• Can it reasonably deliver inflation-beating returns over decades?
• Am I comfortable with the level of volatility I will experience?
• What happens if markets fall between 15% and 20% next year?

Retirement success is not determined by who charges the lowest fee. It is determined by whether your living annuity is structured to deliver sufficient growth, controlled risk and sustainable income for the remainder of your life.

These are not small decisions. They deserve careful modelling and, ideally, the guidance of a suitably qualified financial planner. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to kenny.meiring@sfpadvise.co.za

This story first appeared in our weekly DM168 newspaper, available countrywide for R35.