Share this post

Col 16: Shocking differences a year makes for pensioners

The difference a year can make with an investment-linked living annuity (living annuity) – it depends on whether you invest in a bear or bull market. One year when you retire you will have money forever, but, retire in another year, using the same investments and the same level of pension, you may soon be left with nothing.

Bruce Cameron Column 16 Shocking differences a year makes for pensioners 18June2024

By Bruce Cameron
Co-author to The Ultimate Guide to Retirement in South Africa


A living annuity means you adopt the risk of choosing (preferably with a financial adviser) how the investments will be made and the percentage of your capital and returns you will withdraw as a pension. So, in choosing a financial adviser you need to be absolutely sure you are choosing the right person. The advisor must be:

  • a member of the Financial Planning Institute and is a Certified Financial Planner (CFP);

  • registered with the Financial Sector Conduct Authority (FSCA);

  • an independent adviser, who is not obliged to sell any products of one financial service company; and,

  • is a member of a larger advice firm or network which offers a range of skilled services.


 What the research shows

Andrew Davison, chairman of the Investments Committee of the Actuarial Society of South Africa (ASSA), who did the research, prepared a graph of 75 hypothetical pensioners whose only difference was the year in which they retired.

The graph shows:

Bruce Cameron Graph time in retirement

Wide returns

These wide variety of returns, Davison says, means that a living annuity ‘is not a set-and-forget product. The management of a living annuity needs to be dynamic. This cannot be achieved by simply opting for low drawdown rates and then hoping for the best. Drawdown rates (the pension you receive) and investment strategies may need tweaking over time, taking into account the age, gender and circumstances of the pensioner and their spouse as well as the economic environment.
‘When you buy a living annuity, you sign up for a difficult balancing act – spending your money just fast enough to enjoy a decent standard of living but not so fast that your capital expires before you do.

In Davison’s assumptions the first retired in January 1957, with another retiring every six months thereafter until 1994, allowing for a 30-year period until the end of 2023. All 75 pensioners had a retirement horizon of 30 years and bought their living annuity with a retirement capital of R1 million.

The 75 pensioners had the same income strategy of drawing an income of 5.7% at the start, increasing by inflation every year (Living annuities allow clients to select an income level between 2.5% and 17.5% annually).

The pensioners were also assumed to have applied comparable, diversified investment strategies to the underlying investment portfolios. Davison’s dataset for global asset classes began in 1990, so the investment strategy assumed before that was 100% exposure to domestic South African asset classes. However, the overall allocation to equities, bonds and cash was consistent throughout.


Investment strategy assumptions: 

Prior to 1990

From 1990 onwards


SA: 50%

SA:       30%Global: 20%


SA: 30%

SA:       20%Global: 10%


SA: 20%

SA:       20%

The outcomes were based on actual returns for each asset class and actual inflation (CPI). Annual fees of 1% were factored in, but it must be noted that returns and fees will vary considerably in real life depending on individual circumstances.


The outcomes

Davison says the impact of the fluctuating market conditions on the underlying investment portfolios resulted in 32 out of the 75 living annuities running out of capital within the 30-year period. “This is a high failure rate. If the pensioners concerned happened to have lived a long time, there was a high probability that they were left destitute unless they had other sources of income.”

After only 20 years, the capital in nine of the 75 living annuities had already been depleted, with around half of the living annuities left with less than 50% of the original capital in real terms. The earliest depleted case was recorded after only 13 years. Given that the drawdown and investment strategies were similar, the extreme range of actual outcomes is quite astounding.”


The need for regular re-assessment

Davison says the reality that 32 out of the 75 living annuities ran out of capital within the 30-year retirement horizon despite starting with a reasonably sensible drawdown rate of only 5.7% and having a diversified, balanced investment strategy supports the need for regular re-assessment of both the investment portfolio and the drawdown rate.
Davison says: ‘Unfortunately, it appears that many pensioners are not regularly reviewing their drawdown rates. This probably means these pensioners do not regularly meet with their financial advisers to review underlying investment portfolios.

‘The unknown of how long you might live and hence the risk of depleting your assets prematurely means that living annuities need careful management and a prudent approach to the level of income withdrawn as a monthly pension’.

Davison says that as pensioners get older, their expected time horizon reduces, which means they can afford to increase their percentage drawdown without affecting the sustainability of capital.

He says setting a percentage that is never reviewed is not likely to result in a very stable income in real terms. It also means some older pensioners may be scraping by, yet their capital could support a higher income.

(Below is a table of current drawdown rates for living annuities by age band which seems to indicate that more people are now drawing down less than 5% of their capital which would make their pension far more sustainable)  Source: ASSA

Bruce Cameron graph living annuities

Winning the living annuity race

Davison says rather than selecting a low drawdown rate when investing in a living annuity and then hoping for the best, a more appropriate strategy is to set a conservative drawdown percentage at the start of retirement and then gradually increase the pension amount by inflation. At the same time, you need to keep an eye on what percentage of assets that translates to and, together with your financial adviser, make adjustments if necessary.

“Using mortality, investment return and inflation assumptions, we modelled that a 65-year-old, single male should aim for a sustainable drawdown percentage of around 4.5% with a moderate balanced investment strategy. The same pensioner 15 years later at age 80 can afford a much higher drawdown percentage of 10.5% with a similarly low chance of running out of money.”

There is a lot more detail on this in the book, The Ultimate Guide to Retirement in South Africa. For more information on how to purchase the book go to Buy Now on our website


Related topics:

Share this post