The changing face of retirement income

For decades, the retirement conversation in South Africa was binary: choose a life annuity for security or a living annuity for flexibility. However, for those in or approaching retirement, the landscape has shifted.

South Africa’s ageing population and extended life expectancy mean retirees must make their savings stretch further than ever before. Yet, traditional tools are under pressure. Market volatility, persistent inflation, and unsustainable, high drawdown rates are eroding confidence in pure living annuities. 

Conversely, while life annuities offer security, many clients reject them because of a perceived lack of access to capital and legacy potential.

But these days, it’s no longer about choosing one over the other. It’s about blending annuity solutions.

Blending is not a compromise between two extremes; it is a holistic, outcomes-based approach. By integrating the two into a single solution, advisers can create personalised, sustainable retirement income strategies that withstand the ‘Risky Zone’, which we explain in the table below.

It is not just a product innovation; blending is a mindset shift. We invite financial advisers to leverage these insights and tools to deliver retirement income solutions that work for their clients. This guide explores how blending works, how to calculate the optimal mix, and how to navigate the behavioural barriers hindering client adoption.

What is a blended annuity?

In simple terms, a blended annuity combines the guaranteed lifetime income of a life annuity with the flexibility, investment choice, and legacy potential of a living annuity.

The structure

A blended annuity is typically presented as a single living annuity wrapper that contains two distinct components:

1. 1. A liquid investment component: Managed through discretionary portfolios, offering market participation and capital access.

   2. A lifetime income component: Providing a secure, guaranteed income for life that never runs out.

Crucially, in the South African context, these solutions align with the Default Annuity Regulations, promoting sustainable post-retirement outcomes.

How it works in practice

• Income withdrawals: The guaranteed income from the lifetime income component flows into the living annuity, funding a portion (or all) of the client’s required drawdown. This reduces strain by lowering the effective withdrawals from liquid capital.
• Fees: Advice fees are applied across the market value of the entire wrapper as it is one, integrated solution.

It is an innovative solution that improves client outcomes in retirement, while simultaneously balancing growth and security.

Why blending matters: Striking the balance

The primary goal of a blended annuity is to improve income sustainability without forcing clients to reduce their standard of living. 

Think of it as a combination of flexibility and security. 

Clients still retain control over the investment portfolio, and can choose their drawdown rate (within regulatory limits), enabling flexibility and growth potential. Alongside that flexibility, there’s a safety net: a portion of income is guaranteed for life no matter how markets perform, which reduces the risk of running out of money in retirement.

Mitigating sequence-of-returns risk

Sequencing risk is a minor nuisance while saving, but a significant threat when drawing an income. A practical defence is to blend: to lock in a portion of guaranteed, lifetime income and pull the remainder, more modestly, from a diversified liquid portfolio. By securing a baseline income, the client is less reliant on selling liquid assets during market downturns to fund their lifestyle. This allows the liquid portfolio to recover, better preserving capital value over time.

While several insurers have begun to recognise the value of blending as an optimal retirement income solution, few – if any – provide advisers with clear, actionable guidance on how much to blend for each client. Just SA stands apart by not only championing the blended approach, but also equipping advisers with practical tools such as Income Sustainability Maps and a simplified 3x3 matrix.

Income Sustainability Maps

To determine when blending is necessary, Just SA developed Income Sustainability Maps. These can help advisers categorise their clients based on age and drawdown rates:

1. Safe Zone: Retirees who have a sustainable drawdown and can remain in a living annuity.
2. Risky Zone: Retirees who are at risk of unsustainable income. A blended annuity can improve sustainability without reducing their drawdown. 
3. Danger Zone: Retirees who face a high risk of running out of money. A guaranteed life annuity can eliminate this longevity risk.

How much to blend? From theory to practice

Once you have identified a client in the Risky Zone, the next question is: How much should they allocate to the guaranteed component?

Here are two frameworks to help you structure your advice.

Approach 1: The theoretical model (the benchmark blend)

For advisers who prefer a mathematical approach, the benchmark blend calculates the exact allocation required to balance the portfolio.

The formula:

The goal is to find the blend % where the safe drawdown and the annuity rate meet the client’s required income.

Example:

• Client: 75-year-old male.
• Required drawdown: 7.5%.
• Safe drawdown rate: 5.5% (sustainable living annuity rate).
• Life annuity rate: 9.3%.
• Result: The benchmark blend is approximately 55% allocated to the lifetime income portfolio.

Approach 2: The pragmatic model (the 3x3 matrix)

For client conversations, a simpler matrix is often more effective. This model uses two inputs: age band and drawdown risk level to recommend three-tier allocations to the lifetime income component: 25%, 50%, or 75%.

• Low risk/younger: 25% blend to anchor the portfolio.
• Medium risk/mid-retirement: 50% blend to balance growth and security.
• High risk/older: 75% blend to maximise longevity protection.

The 3x3 matrix

To apply this table, follow these steps:

1. Pick the applicable column based on the age of your client.
2. Look up the required drawdown rate in the applicable row of that column.

The column on the far right shows the recommended percentage to blend.

This matrix allows advisers to demonstrate how the strategy can evolve as the client moves through different life stages. Unlike splitting between a life annuity and a living annuity at retirement, a blended annuity allows incremental allocations to the lifetime income portfolio over time or as needs change. 

Overcoming barriers: Understanding investor psychology

Despite the mathematical logic, clients often resist annuitisation because of deep-seated behavioural biases. Understanding these can help you guide clients to make better decisions.

The biases at play

• Loss aversion: The fear of ‘losing’ capital to an insurer often outweighs the fear of running out of money.
• Present bias: Clients overvalue immediate flexibility (access to cash now) over future security (income at age 95).
• Endowment effect: Assigning a higher value to something simply because you already own it. Because living annuities offer a sense of ‘ownership’ of capital, clients are often unwilling to transfer a portion to a lifetime income component that cannot be surrendered.
• Ambiguity aversion: Avoiding options that have unknown or uncertain outcomes. Retirees often choose a fixed increase (e.g. 5%) because it is known, but inflation is the more devastating and likely risk over a 30-year retirement.
• Framing effect: Annuities are often framed as ‘giving up control’ rather than ‘insuring income’.
• Money illusion: Clients focus on nominal returns rather than on real, inflation-adjusted purchasing power.

Suitability rule of thumb

This simplified framework allows advisers to quickly determine which conversation they need to have with a client based on their position within the Income Sustainability Map.

• The Safe Zone (pure living annuity): For clients with low drawdown rates relative to their age. 
• The Risky Zone (blended living annuity): This is where blending is the optimal strategy. The conversation shifts to how a blend vastly improves income sustainability without requiring the client to reduce their current drawdown.
• The Danger Zone (pure life annuity): For clients whose drawdown rates are unsustainably high. 

This rule of thumb is a simplified framework for advisers to quickly determine which conversation they need to have with a client, based on the client's drawdown rate and age.

Here is the explanation of each zone and how the conversation will shift for each.

1. The Safe Zone = Discuss investment strategy

Who fits here? These are usually clients with a low drawdown rate (typically below 5%, depending on age). They are withdrawing less than their portfolio is expected to grow. 

Why is it ‘safe’? Because the client withdraws so little, the risk of running out of money is mathematically very low. Even if they live to 100 or the market has a bad year, their capital buffer is large enough to absorb the shock.

The adviser conversation: Since the income is secure, you don't need to insure it. Instead, you focus on the assets.

• Focus: ‘How do we maximise growth?’
• Topic: You discuss asset allocation, offshore exposure, and beating inflation.
• Goal: The goal here is often legacy. Since they won't spend all the money, the strategy is about growing the capital for their heirs.
• Product: A pure living annuity is a suitable solution here.

2. The Risky Zone = Discuss blending

Who fits here? These are clients drawing down at a rate that is sustainable only if they don’t live too long and markets perform well. This safe drawdown rate is typically 4% to 8%. A third of South African living annuitants sit in the Risky Zone.

Why is it ‘risky’? They are in a fragile position.

• Sequence-of-returns risk: If the market crashes early in their retirement, they will deplete their capital rapidly and may never recover.
• Longevity risk: If they live longer than average (e.g. over 82 for males, and over 87 for females), they are likely to outlive their savings.

The adviser conversation: You stop focusing solely on ‘hoping for high returns’ and start focusing on insurance.

• Focus: ‘How do we take the risk of running out of money off your list of concerns?’
• Topic: You introduce blending. You propose taking a portion of their capital to purchase a lifetime income (a life annuity) within their living annuity.
• The logic: By securing their essential expenses with a guaranteed income, you remove the longevity risk for that portion. This allows the remaining liquid capital to be invested for growth, as less has to be drawn from that portion.
• Goal: Sustainability. The goal is to ensure the money lasts as long as the client does.

3. The Danger Zone = Discuss a life annuity

Who fits here? These are typically clients with high drawdown rates, well above sustainable levels. They are situated above the ‘life annuity rate’ line on the Income Sustainability Map.

Why is it ‘dangerous’? They are depleting their capital at a rate that makes it very likely that they will run out of money if they live a normal lifespan. The risk isn't just ‘volatility’ – it is the high certainty of depletion. A living annuity cannot sustain these withdrawal rates.

The adviser conversation: You stop discussing ‘flexibility’ or ‘growth’ entirely. The conversation shifts to damage control and securing a floor. The conversation must focus on security, as a life annuity is the only way to eliminate the risk of running out of money.

• Focus: ‘How do we guarantee that your income never hits zero?’
• Topic: You discuss a life annuity.
• The logic: At this stage, the only way to sustain a high income level for life is to pool risk with an insurer. A life annuity provides mortality credits (benefits from those who pass away early subsidising those who live longer), allowing it to pay a higher, sustainable income than a living annuity ever could. It effectively insures the client against living too long.
• Goal: Security. The primary goal is to eliminate the risk of running out of money entirely.
• Product: A life annuity is the optimal solution here.

The myth busters

Advisers can use these counterpoints to reframe the conversation:

The adviser’s advantage: Making blending work

Blending is not just good for the client; it’s good for financial advisers. By combining technical precision with behavioural coaching, advisers can position themselves as ‘retirement income architects’.

• Treating Customers Fairly (TCF): Blending supports outcomes-based advice principles by prioritising the sustainability of income over mere asset accumulation.
• Client retention: By reducing the risk of portfolio depletion, blending enables clients to stay invested longer. This maintains the relationship and the assets under advice for a longer duration.
• Education tool: Using Income Sustainability Maps and the 3x3 matrix simplifies complex actuarial concepts into visual narratives that clients can understand and accept.

Conclusion: Designing retirement income with confidence

The era of choosing between ‘secure’ and ‘flexible’ is over. Blended annuities offer an optimal balance of capital growth and income security in a single, simplified solution.

For the modern adviser, the ability to structure a blended solution is a critical skill. By utilising practical tools such as the 3x3 matrix and addressing the behavioural biases that cloud client judgement, you can design retirement plans that are robust enough to withstand market volatility and secure enough to last a lifetime.