Allan Gray Living Annuity Review: Fees, Drawdowns & How It Works

A living annuity is the product most South African retirement savings flow into at retirement: your retirement pot buys an investment account that pays you an income you choose, within legislated limits, while the balance stays invested. Allan Gray's living annuity is among the most popular in the country. This review explains how the product works, what it costs, the drawdown decision that dominates outcomes, and — honestly — who shouldn't choose a living annuity at all.

The rules every living annuity follows

These are legislation, not Allan Gray policy — they apply to every provider:

• Drawdown band: you must draw between 2.5% and 17.5% of the investment value per year;
• Annual reset: you can change your income level and payment frequency (monthly, quarterly or annually) once a year, on your policy anniversary;
• No guarantees: the income isn't insured — if the investments underperform or you draw too much, the capital shrinks and can run out;
• Beneficiaries: the remaining balance passes to your nominated beneficiaries on death — one of the living annuity's genuine advantages over a life annuity, where payments generally die with you (or a guaranteed period).

How the Allan Gray version works

You transfer your retirement savings in, choose from Allan Gray's fund range (and selected external funds on its platform), set your drawdown percentage and payment frequency, and manage everything through their secure online account. The moving parts you control: which funds (growth vs stability mix), what drawdown (the big one), and which frequency (monthly for most retirees). Allan Gray's positioning has always been long-horizon active management — their equity-heavy funds aim to outpace inflation over time, which is exactly what a 30-year retirement income needs, at the cost of shorter-term swings you must be able to stomach while drawing an income.

The fees — read this layer by layer

• Investment management fees: charged by the funds you choose — Allan Gray's actively managed funds typically run in the region of 1–2% a year depending on the fund and its performance-fee structure;
• Administration/platform fee: the account wrapper's charge, tiered by investment size;
• Adviser fee (only if you use one): an initial fee of up to 1.5% (excl. VAT) can be specified where an adviser is appointed, plus ongoing advice fees you agree — going direct avoids these entirely;
• The number that matters: the Effective Annual Cost (EAC). Every provider must disclose it on request. Compare EACs across providers on YOUR amount — a single percentage point of annual cost, compounded over a 25-year retirement, consumes years of income.

The drawdown decision (this dominates everything)

The research consensus is blunt: an income with the best chance of lasting starts around 4% or less of capital, drawn as a fixed rand amount increased by inflation annually — not re-set as a percentage of a shrinking balance. The legislated maximum of 17.5% exists for flexibility, not as a suggestion: drawing double digits from any balanced portfolio reliably exhausts it. Three practical rules:

1. Start as low as your budget allows — you can raise income at any anniversary; rebuilding depleted capital is far harder;
2. In bad market years, hold your rand income flat instead of taking the inflation increase — small sacrifices early compound into years of extra longevity;
3. Test your number before retiring: project the maths with our compound interest calculator and pressure-test your overall plan against our guide to how much you need to retire.

How living annuity income is taxed

Living annuity income is taxed as ordinary income through PAYE — the provider deducts tax per the SARS tables before paying you, exactly like a salary. Practical consequences: your drawdown choice is a gross figure (a 6% drawdown does not mean 6% in your pocket); splitting retirement income across tax years and rebates (the over-65 and over-75 rebates raise your tax-free floor) rewards planning; and because the annuity income stacks on top of any other income you earn, retirees who keep working part-time sometimes draw the legislated minimum 2.5% purely to preserve capital while the salary lasts. Run your own combination through our income tax calculator before setting the percentage.

Structuring the funds inside: the bucket logic

The classic living-annuity allocation splits the balance into time-horizon buckets: roughly two to three years of income requirements in stable, low-volatility funds (money market/income funds), and the remainder in growth assets that fight inflation over decades. The stable bucket is what lets you leave the growth bucket alone in a crash instead of selling equities at the bottom to fund next month's income — sequence-of-returns risk is the technical name for what destroys living annuities, and the bucket structure is the standard defence. Allan Gray's fund range supports this structure directly; rebalance the buckets at your annual review rather than reacting to headlines.

Living annuity vs life annuity: the real choice

The living annuity's flexibility, investment control and beneficiary value come with one hard risk: longevity. A life (guaranteed) annuity inverts the deal — an insurer pays you a guaranteed income for life, whatever markets do and however long you live, but the capital is spent and flexibility is gone. The honest guidance most planners converge on: retirees with modest capital and no other income should weight toward guarantees; those with larger capital or other income can carry living-annuity risk; and blending both — a life annuity covering essential expenses, a living annuity for the rest — is often the adult answer. You can also convert a living annuity to a life annuity later (not the reverse), which argues for the living annuity as a reasonable starting structure when in doubt.

Getting in: how the transition works at retirement

1. At retirement your pension, provident, preservation or RA money becomes available for the compulsory annuity purchase (after any lump-sum portion you take under the retirement tax table);
2. You (or your adviser) complete the living-annuity application, nominate beneficiaries, choose funds and set the starting drawdown and frequency;
3. The transfer between the fund and the annuity is a tax-neutral event — tax only applies to income as it's drawn;
4. First payment lands on your chosen cycle; thereafter the product runs itself until your annual anniversary review.

The single best habit: diarise the anniversary and treat it as a real review — drawdown sanity check, bucket rebalance, beneficiary confirmation — rather than a letter you file.

The mistakes that sink living annuities

• Starting the drawdown too high because the percentage "sounds small" — 8% sounds modest and reliably isn't;
• Percentage-of-balance income in falling markets — taking a fixed percentage of a shrinking pot accelerates the shrink; fix the rand amount instead;
• All-equity or all-cash allocations — the first forces selling shares in crashes to fund income, the second guarantees inflation erosion; the bucket structure exists for exactly this;
• Forgetting beneficiaries — an outdated nomination is the cheapest estate problem to prevent and among the most painful to inherit;
• Never checking the EAC — costs compound as relentlessly as returns, and transfers between providers are allowed.

Strengths and watch-outs of the Allan Gray option

• Strengths: a long track record with disciplined, transparent active management; clean online administration; a broad fund range including external managers; direct (no-adviser) investing supported;
• Watch-outs: active management fees are meaningful — compare the EAC against passive/index-based living annuities, which have grown strongly precisely on cost; performance is never guaranteed, and an equity-heavy allocation demands tolerance for drawdown years while you're withdrawing income;
• The universal watch-out: whatever the provider, the drawdown percentage you choose matters more than the manager you choose.

Frequently asked questions

How much can I draw from a living annuity?

Between 2.5% and 17.5% of the investment value per year — adjustable once a year on your policy anniversary. Sustainable retirements typically draw around 4% or less.

What happens to my Allan Gray living annuity when I die?

The remaining investment passes to your nominated beneficiaries, who can take it as income, lump sum (tax rules apply) or continue the annuity — a structural advantage over life annuities.

Can my living annuity run out?

Yes — that's its defining risk. High drawdowns plus poor returns deplete capital, and payments stop when it's gone. The drawdown discipline above exists precisely because of this.

Can I move my living annuity to another provider?

Yes, living annuities can be transferred between providers — comparing Effective Annual Cost is the rational trigger for doing so.

Can I add money to a living annuity later?

You can transfer in additional retirement-fund proceeds (for instance when a later preservation fund or RA matures), but you can't contribute cash savings directly — living annuities are funded from retirement money. Discretionary savings sit alongside, not inside, the annuity.

Is living annuity income taxed?

Yes — it's taxed as ordinary income via PAYE before it reaches you, with the age rebates (65+, 75+) raising your tax-free floor. Your drawdown percentage is a gross figure.

Product rules per legislation and Allan Gray's published terms at the time of writing; fees depend on your funds and amount — request the Effective Annual Cost for your specific case. General information, not financial advice; retirement income decisions justify a certified financial planner.