For most of your working life, the goal is simple: build up retirement savings. Then you reach the day you actually retire, and the question quietly changes. It is no longer “how do I grow this money?” but “how do I turn it into an income that lasts as long as I do?”

In South Africa, the answer for many people is a living annuity. It offers freedom, flexibility and the ability to leave money to your family. But that same freedom is exactly what allows some retirees to quietly run out of money. Understanding how it works — before you sign — matters more than almost any other decision you will make at retirement.

What a living annuity actually is

A living annuity is a retirement income product. When you retire from a pension, provident, preservation or retirement annuity fund, you use that capital to buy a living annuity. Instead of handing your savings to an insurer in exchange for a fixed income, you keep the money invested and draw a regular income from it.

Think of it as a tank of water you control. You decide roughly how the water is stored, you open the tap to a level you choose, and you live on what comes out. The catch is that the tank has to keep refilling through investment growth — otherwise the level drops faster than you expect.

Where the money comes from

The capital usually comes from the retirement funds you have built up: a workplace pension or provident fund, a preservation fund, or a retirement annuity. At retirement, that accumulated savings becomes the lump sum used to set up the annuity.

The two-thirds annuitisation rule, in plain terms

For most retirement funds, you may take up to one-third of your savings as a cash lump sum at retirement (subject to tax). The remaining two-thirds must be used to provide a regular income — and that is where a living annuity (or a guaranteed annuity) comes in. There are some exceptions for small balances, but the two-thirds principle is the rule most retirees deal with.

The drawdown rate — the single most important number

Your drawdown rate is the percentage of your capital you choose to take as income each year. It is the one number that, more than anything else, decides whether your money lasts. South African rules set the range, but you choose where to sit inside it.

The legal range: 2.5% to 17.5% a year

You may draw a minimum of 2.5% and a maximum of 17.5% of your fund value each year. That is a very wide band. Drawing near the top may feel generous in the early years, but it can drain capital quickly — especially if markets are weak at the same time.

When you can change it

You can adjust your income once a year, on your policy anniversary. This is helpful, but it is also a limit: if you set your income too high, you generally cannot fix it until the next anniversary comes around.

What “sustainable” really looks like

A sustainable drawdown is one where your income, fees and inflation together stay below your investment returns over time — so your capital is not steadily eroded. There is no single magic number, and the imported “4% rule” is a rule of thumb, not a South African guarantee. For a fuller treatment, see our guide on what a safe drawdown rate looks like in South Africa.

Watch the short video below for a plain explanation of the three decisions you control — and the drawdown mistake an adviser sees most often.

To turn the abstract 2.5%–17.5% range into something personal, use the calculator below. Enter a capital amount, a drawdown rate and an assumed return to see an estimated monthly income and a rough sense of how long the capital could last.

How a living annuity is taxed

The tax treatment is simpler than many people fear, and it works in your favour while the money stays invested.

• The transfer in is tax-free. Moving your two-thirds from a retirement fund into a living annuity does not trigger tax.
• Growth inside the annuity is not taxed. You pay no income tax, dividends tax or capital gains tax on the growth while it stays in the annuity.
• Your income is taxed like a salary. The income you draw is taxed at your marginal rate through PAYE, just as employment income would be.

Because the income is taxed at your marginal rate, the size of the income you choose has a tax consequence as well as a sustainability consequence. Where your situation is complex, professional tax advice is worthwhile.

How your money is invested

A living annuity is not bound by Regulation 28, the rule that limits asset exposure inside pre-retirement funds. That gives you more freedom in how the portfolio is built — including local versus offshore exposure — but freedom is not the same as a free lunch.

The hard part is that the portfolio has to do two jobs at once: pay you an income today and grow enough to keep paying you for decades. Hold too little growth and your capital may not keep up with rising costs. Hold too much risk and a bad year early on can do lasting damage.

Inflation is the quiet pressure most retirees underestimate — a comfortable income today can feel tight in fifteen years. We cover this in detail in why South African retirees underestimate inflation.

What happens to a living annuity when you die

This is one of the most valued features of a living annuity, and a genuine point of difference from a guaranteed annuity.

• Nominated beneficiaries inherit the residual capital. They can usually take it as a lump sum, continue the income in their own annuity, or combine the two.
• It usually falls outside your estate. Where beneficiaries are nominated, the remaining capital generally does not form part of your estate, which typically means it avoids estate duty and executor’s fees on that money.
• If you nominate no one, it can fall into your estate. That may expose it to delays, executor’s fees and estate duty — which is why keeping your beneficiary nominations up to date matters.

Because beneficiary nominations interact with the rest of your estate plan, this is worth reviewing alongside your will rather than in isolation.

Living annuity vs guaranteed (life) annuity

The decision most retirees are really weighing is between a living annuity and a guaranteed annuity. They solve the same problem in opposite ways.

For many retirees the honest answer is not “either/or” but a blend: a guaranteed annuity to cover essential expenses for certainty, and a living annuity for flexibility and legacy. One important caution: you can convert a living annuity into a guaranteed annuity, but you cannot turn a guaranteed annuity back into a living one. The direction only runs one way, which is why the decision deserves care.

How the two-pot system fits in

South Africa’s two-pot retirement system took effect on 1 September 2024. From that date, new retirement contributions are split between a savings component you can access before retirement (within limits) and a retirement component that is preserved for retirement.

For someone retiring now, the practical point is that the retirement component must still be used to provide an income at retirement — through a living or guaranteed annuity — under the same annuitisation principles. The two-pot system changes how savings build up over time; it does not remove the core annuitisation decision you face at retirement.

Who a living annuity suits — and who it doesn’t

Because the inputs — your capital, your health, your other income, your tax position and your family — are personal, this is rarely a sound do-it-yourself decision. It is the kind of choice worth working through with an adviser before you commit.

Frequently asked questions

A calm conclusion

A living annuity is a powerful, flexible way to draw an income in retirement — but the flexibility that makes it attractive is exactly what demands discipline. The three decisions you control, the drawdown rate above all, will quietly shape the rest of your retirement.

There is no single right answer that suits everyone. The right answer is the one that fits your capital, your needs, your tax position and your family — reviewed honestly each year. Before you commit to a decision that is largely one-directional, it is worth speaking to an AS Brokers adviser.