Why hybrid annuities are gaining ground

For many retirees, the annuity decision has long been framed as a binary one: choose the certainty of a guaranteed life annuity or the flexibility of a living annuity. But hybrid annuities are changing that conversation. Bjorn Ladewig from Just SA says the appeal lies in combining the strengths of both structures. “Use the living annuity part to get growth on your portfolio and use the life annuity part to get security,” he says. “Depending on how much you need from each, that then drives the dial.”

An income for life vs control

A guaranteed life annuity is designed to turn retirement savings into an income for life. It may offer different increase options, but the core benefit is certainty. Ladewig describes it as “the salary that you’re now earning, but without working anymore”. 

A living annuity, by contrast, gives clients control over drawdowns, within the legal limits of 2.5% and 17.5% a year, and preserves any remaining capital for beneficiaries. That makes it attractive from a legacy and flexibility perspective. The risk is that clients are effectively self-insuring against longevity and market volatility. “The money could run out,” Ladewig warns. 

The best of both worlds

Hybrid annuities aim to address this tension. Rather than forcing clients into an all-or-nothing choice, they allow a portion of a living annuity to be allocated to a guaranteed life annuity component. In practice, this can provide a secure income floor while leaving the balance invested for growth and flexibility. The option has been available in South Africa since 2017, but Ladewig says take-up has taken time because advisers and clients needed to build confidence around two key questions: when to blend and how much to allocate. That is where advice becomes critical. 

Addressing the need

The starting point is not the product, but the income need. Advisers should help clients distinguish between essential spending and discretionary spending, then express the required income as a percentage of retirement savings. Ladewig points to sustainable drawdown rates as a useful guide. Around retirement age, he says, a safe drawdown rate is often in the region of 4% to 5%, although this varies by age and gender. A 4% drawdown implies that a client needs about 25 times their annual income saved. Put another way, someone needing R50 000 a month would need around R15m in retirement capital.

Just SA uses an income sustainability mapping framework that groups clients into three broad zones: safe, risky and danger. Ladewig says only about a third of the more than 40 000 living annuities it has mapped fall into the safe zone, where drawdowns are comfortably sustainable. Another third fall into the risky zone, where blending can help turn an uncertain income plan into a more durable one. The final third sits in the danger zone, where the income required is higher than a life annuity can sustainably provide.

Why advice is essential

For advisers, the challenge is that the regulatory framework gives clients wide freedom, but not always enough guidance. Living annuity investors may draw between 2.5% and 17.5% a year, but legality does not necessarily mean sustainability. Ladewig notes that difficult conversations around high drawdowns are not always happening. A hybrid annuity can help reframe those conversations. Rather than asking whether a client should choose a living annuity or a life annuity, advisers can start with the income requirement. The key question is not how much capital the client has in rand terms, but what percentage of that capital they need to draw each year.

Clients drawing below sustainable levels may be well served by a pure living annuity. Those drawing above safe levels, but within what a life annuity can support, should consider a hybrid structure. Those needing more than even a life annuity can provide, require a more difficult conversation about spending, expectations and trade-offs. Strong markets can make high drawdowns feel affordable, but recent returns should not be mistaken for a long-term plan. “If you’re getting 20% returns on balanced funds, yes, you can afford drawing down 10%,” Ladewig says. “But markets are in the long term a lot more volatile than that.”

Behaviour and betting on the long game

Behavioural factors, such as client personalities, also matter. Some retirees are comfortable with market volatility and value flexibility. Others check fund performance constantly and become anxious when markets fall. For these clients, a guaranteed income component can reduce stress and support better decision-making. 

Longevity is another behavioural blind spot. Ladewig says many retirees underestimate how long they may live. Even if a client correctly estimates life expectancy, that figure is only a midpoint. There is still a 50% chance of living longer. This is where a guaranteed income component can help. It can reduce the risk of poor sequencing, provide confidence through volatile markets, and help clients avoid panic-driven decisions.

Bridging the gap

Just SA’s Retirement Insights research also points to a gap between what retirees say they want and the products they choose. Respondents prioritise income that lasts, medical aid cover, protection from market movements, and inflation-linked income. Yet, many still default to living annuities, which primarily offer flexibility and legacy potential, although Ladewig believes strongly that retirees may need to put their own income security first, rather than think about legacy. “It’s a little bit like the oxygen masks in the aeroplane,” he says. “You help yourself first, only then can you help others.”

Looking ahead, hybrid annuities are likely to become a bigger part of retirement planning. They give advisers a more nuanced toolkit and allow clients to retain some control and legacy potential while securing part of their income for life. As Ladewig puts it, the message is simple: “I don’t have to do all or nothing. I can combine the two.”