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What Inflation Does to Your Living Annuity Drawdown Rate
Inflation doesn't just erode your income — it pushes your living annuity drawdown rate higher every year until the 17.5% ceiling arrives and payments stop.
AS Brokers Insight
The Point of Ruin — What Inflation Does to Your Living Annuity Drawdown Rate
Inflation does not just reduce what your money buys. It quietly pushes your drawdown rate higher every year — until the legal ceiling arrives and there is nowhere left to go.
9 min read · June 2026 · Retirement Income Survival
Quick Answer
What is the point of ruin in a living annuity? The point of ruin is when a living annuity's drawdown rate reaches its legal maximum of 17.5% of capital per year, as set by the Financial Sector Conduct Authority (FSCA). At this level, withdrawals almost certainly exceed investment returns and the fund depletes rapidly. Once 17.5% is reached, the rand income amount can no longer be increased — and inflation continues to erode its purchasing power until the capital is exhausted and payments stop entirely.
Meet Johan. He Is Not Unusual.
Johan retired at 62 with R4.2 million in a living annuity. He felt comfortable. His adviser had run the numbers, and at a drawdown rate of 6.5% he would receive just over R22,000 per month — enough to cover his expenses with a little left over. The plan looked sound.
But Johan is now 74. His monthly expenses have climbed steadily — groceries, electricity, medical aid, rates, insurance. He has had to increase his income each year just to maintain a reasonable standard of living. His drawdown rate has moved from 6.5% to 9.1%. His capital, despite reasonable investment returns, is shrinking. His adviser has recently used a word Johan had never heard before.
The point of ruin.
Johan is not irresponsible. He did not live extravagantly. He did not make reckless investment choices. He simply did not understand that inflation does two things to a living annuity simultaneously — and that the combination is far more dangerous than either threat alone. Understanding why inflation is the biggest threat to retirement income is the first step toward protecting yourself from it.
"Research by Just SA found that one in three living annuity clients in South Africa risks running out of money. Most of them started with a plan that looked perfectly reasonable."
How a Drawdown Rate Actually Works
A living annuity is not a salary. It is a pool of capital from which you draw income each year. As regulated by the Financial Sector Conduct Authority (FSCA), the law requires that you draw a minimum of 2.5% and a maximum of 17.5% of the remaining capital value annually. You choose your rate once a year on your policy anniversary date — and that decision stands for the next twelve months.
That percentage is applied to the current capital value — not the original amount you invested. So if your capital grows, the same percentage produces more rand income. If your capital shrinks, the same percentage produces less. And if you need the same rand income as before from a smaller capital base, your percentage must rise.
This is the mechanism that makes inflation so dangerous inside a living annuity. It does not just erode your purchasing power. It forces your drawdown rate upward, year after year, in a direction that has only one ceiling — and that ceiling has a name.
The Inflation Ratchet — How 6% Becomes 12%
Here is the mechanism most retirees never see clearly until it is too late to act on it comfortably.
Imagine you retire with R3 million in a living annuity. You set your drawdown rate at 6%, giving you R180,000 per year — R15,000 per month. Inflation runs at 6% per year. Your investment returns average 9% per year. You feel in control.
But each year, to maintain your purchasing power, you must increase your rand withdrawal by 6%. Meanwhile, your capital grows — but not as fast as you are drawing from it. The percentage you need to draw edges higher. Not dramatically. Not alarmingly. Just steadily, quietly, every year. This is the inflation ratchet. It clicks in one direction only, and it never resets.
| Year | Age | Capital Value | Monthly Income | Drawdown Rate |
|---|---|---|---|---|
| Retirement | 62 | R3,000,000 | R15,000 | 6.0% |
| Year 5 | 67 | R3,180,000 | R20,073 | 7.6% |
| Year 10 | 72 | R2,940,000 | R26,861 | 11.0% |
| Year 15 | 77 | R2,210,000 | R35,950 | 19.5%* |
| * Exceeds the 17.5% FSCA legal maximum. Income can no longer be increased. Capital depletion accelerates. Inflation continues regardless. Figures are illustrative, based on 6% annual inflation and 9% average investment return. Market values can rise or fall. | ||||
There is no alarm. There is no letter from the fund. There is only the annual anniversary date — and a quiet number that is moving in one direction. Use the AS Brokers Run Out Of Capital Calculator to model exactly this kind of trajectory against your own capital, drawdown rate, and inflation assumptions.
The Three Drawdown Zones
Based on publicly available guidance from the FSCA and industry research, living annuity clients are typically assessed across three zones. Where you sit right now matters — but where you are heading matters more.
Capital is being drawn at a level considered sustainable for your age and life expectancy. Investment returns are likely to exceed withdrawals over time, and the fund has a reasonable probability of lasting the full duration of retirement. This is the target zone — but it requires deliberate discipline to stay in as inflation pushes costs higher each year.
Withdrawals exceed the recommended sustainable rate for long-term capital preservation. Capital is likely declining in real terms. If investment returns disappoint or the retiree lives longer than projected, depletion before death is a realistic outcome. Many South African retirees are in this zone without knowing it — and the inflation ratchet is already turning.
The probability of depleting capital before death is high. Capital is shrinking. The rand income cannot keep pace with inflation. The point of ruin — 17.5% — is now visible on the horizon. Research by Just SA across approximately 20% of the living annuity market found that one in three living annuity clients falls into a zone where running out of money is a material risk. In the danger zone, the conversation shifts from optimisation to crisis management — and the options narrow with every passing year.
The Golden Equation
There is a simple test for whether a living annuity is sustainable over the long term. Industry practitioners call it the golden equation:
Investment return must exceed: drawdown rate + investment fees + inflation.
If your fund earns 9% per year, fees are 1.5%, inflation is 6%, and your drawdown rate is 5%, the total requirement is 12.5%. Nine percent does not cover 12.5%. That means capital is eroding even in a year of reasonable investment performance — and most retirees never see it until the statement confirms what the ratchet already knew.
Most retirees watch their drawdown rate and their investment return. Very few factor in fees and inflation simultaneously. The golden equation forces all four variables into view at once — and the result is often the most important number a retiree has never calculated.
What the Industry Data Tells Us
The living annuity market in South Africa is large, well-documented, and deeply instructive. Based on publicly available industry statistics, the following picture emerges — and every figure in it deserves attention.
A 5.6% average is an encouraging trend. But an average conceals enormous variation. A retiree drawing 4% and a retiree drawing 14% both contribute to the same national average. The distribution matters far more than the mean — and based on available data, a meaningful portion of those 554,000 policies are in the risky or danger zone right now, with the ratchet still turning.
Industry guidance broadly suggests that drawdown rates of 4% to 5% in the first decade of retirement, and below 8% in later years, represent a prudent range for capital preservation over a 25 to 30 year retirement. The question for every living annuity holder is not only where their rate sits today — but where the golden equation says it is heading.
Use the AS Brokers Run Out Of Capital Calculator below to test your own position. Enter your current capital value, monthly income requirement, expected investment return, and inflation assumption — and see whether your living annuity is on a sustainable path, or whether the ratchet is already working against you.
What to Do If Your Drawdown Rate Is Already Climbing
The options available to a retiree narrow as the drawdown rate climbs. Action taken at 7% looks very different from action taken at 13%. The earlier the conversation happens, the more room there is to work with. This is not personalised advice — it is a framework for the kinds of questions worth raising with a qualified adviser.
Based on publicly available information, the responses available to a retiree with a climbing drawdown rate generally fall into four areas:
1. Review the drawdown rate before the next anniversary date
The anniversary date is the one moment each year when the drawdown rate can be adjusted. Missing it means living with the current rate for another twelve months. Reviewing your position three to four months in advance gives time for proper analysis — and, if needed, a decision to hold the rate rather than increase it to match inflation.
2. Distinguish essential from discretionary spending
Not all retirement expenses are equally urgent. A structured review of spending — essential versus discretionary — can sometimes create room to hold the drawdown rate steady for a period, giving investment returns the opportunity to rebuild the capital base. This is not always possible, but it is often worth examining before reaching for a higher percentage.
3. Consider whether a switch to a guaranteed life annuity is appropriate
Based on publicly available information, it is possible in certain circumstances to use remaining living annuity capital to purchase a guaranteed life annuity — which provides a fixed income for life regardless of market performance or longevity. This is an irreversible decision. Capital is exchanged for a guaranteed income stream and cannot be reclaimed. It eliminates the risk of running out of money but removes flexibility and the ability to pass capital to beneficiaries. Speak to an AS Brokers adviser before considering this option.
4. Review the underlying investment portfolio
The golden equation requires investment returns to exceed the combined pressure of drawdown rate, fees, and inflation. A portfolio that is too conservatively positioned — holding too much in cash or low-return assets — may be contributing to the problem. Portfolio construction inside a living annuity is a balance between growth and risk that is best reviewed by a qualified adviser, not adjusted unilaterally.
None of these steps replaces a proper professional review. The point is that options exist — and they are worth more at 7% than at 14%. Waiting for a crisis does not create more choices. It eliminates them.
"The point of ruin is not an event. It is the last stop on a journey that began years earlier — and could have been redirected at almost any point along the way."
Watch the explainer below for a plain-language walkthrough of how the inflation ratchet works in a living annuity — and what the three drawdown zones look like in practice.
Key Takeaways
- The point of ruin is when a living annuity drawdown rate reaches the 17.5% legal maximum set by the FSCA. Income can no longer be increased, and capital is depleting rapidly. Most retirees who arrive here started with a drawdown rate that appeared entirely sound.
- Inflation does two things at once: it reduces purchasing power and forces the drawdown rate percentage upward each year. The inflation ratchet clicks in one direction and never resets.
- The golden equation is the sustainability test: investment return must exceed drawdown rate plus fees plus inflation simultaneously. Most retirees only monitor one or two of these four variables at a time.
- Based on publicly available industry research, one in three South African living annuity clients is at material risk of running out of money. The average national drawdown rate of 5.6% is encouraging — but averages hide wide variation across 554,000+ policies.
- Options exist — but they narrow as the rate climbs. Review your position before the next anniversary date. Use the Run Out Of Capital Calculator to model your trajectory. Then speak to an AS Brokers adviser.
The Journey Nobody Plans For
Johan, the retiree we met at the beginning of this article, did nothing wrong in the conventional sense. He saved. He took advice. He chose a drawdown rate that appeared reasonable at the time. He retired with what felt like security.
What he did not have was a clear picture of the inflation ratchet and what it would do to his drawdown rate over twelve years. That picture is not complicated. It does not require a finance degree. It requires one honest conversation — with someone who will show you all four variables in the golden equation at the same time and tell you the truth about where the current trajectory leads.
The point of ruin is not an event. It is the last stop on a journey that begins the moment a drawdown rate is set and inflation starts its quiet work. Most of the people who arrive there never saw it coming — not because they were careless, but because nobody showed them the map.
Know your current drawdown rate. Know your capital value. Run the golden equation. And if you do not like what the numbers say, that is not a reason for alarm — it is a reason for a conversation. The silent tax of inflation works slowly and without announcement. The response to it should not.
Common Questions
What exactly is the point of ruin in a living annuity?
The point of ruin is when a living annuity's drawdown rate reaches the legal maximum of 17.5% per year, as set by the FSCA. At this ceiling, withdrawals almost certainly exceed investment returns and capital depletes rapidly. Once 17.5% is reached, the rand income cannot be increased — and inflation continues eroding its purchasing power until the fund is exhausted and payments stop entirely.
What is a safe drawdown rate for a living annuity in South Africa?
Based on publicly available industry guidance, drawdown rates of 4% to 5% in the first decade of retirement and below 8% in later years are generally considered prudent for capital preservation over a long retirement. The national average in 2024 was 5.6% — the lowest recorded since 2011. Individual circumstances vary significantly. Use the AS Brokers Run Out Of Capital Calculator to model your own numbers, and speak to an adviser to verify your position.
How does inflation force a living annuity drawdown rate higher over time?
Each year, maintaining purchasing power requires more rands. If the capital base has not grown proportionally, the percentage required to produce that same income increases. This is the inflation ratchet. At 6% annual inflation, a drawdown rate that starts at 6% can breach 10% within a decade — even with 9% average investment returns. The ratchet clicks in one direction and never resets. Read our article on using the inflation calculator to model your own purchasing power to see these forces in action.
What happens when a living annuity runs out of money?
When a living annuity is fully depleted, payments stop. There is no guaranteed income backstop and no minimum payment from the fund. The retiree becomes entirely dependent on other income sources — other pension funds, rental income, family support, or the state old age grant. This is the fundamental longevity risk of the living annuity structure: complete flexibility and potential growth, in exchange for carrying the full risk of depletion and outliving your capital yourself.
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Disclosure: Albert Schuurman is an authorised independent financial adviser and may earn remuneration from products or services discussed on this website. Information presented may be sourced from product providers, brochures, fact sheets, official websites, publicly available information, and industry publications. Product features, rewards, benefits, fees, returns, programme rules, and terms may change over time. Information is believed to be accurate at the date of publication but should be verified directly with the relevant product provider, insurer, investment manager, administrator, or service provider before any decision is made.
Note: Market values can rise or fall, and past performance is not a guarantee of future outcomes.