Question

I will be retiring shortly and am looking at buying a living annuity.  I was told that the main item to look at would be costs.  The plan that I am looking at has an admin fee of 0.35% and an investment fee of 0.4%.  Is this good?

Answer

An admin fee of 0.35% and an investment fee (TER) of 0.4% gives you a total investment cost of 0.75% per year before advice fees. In today’s market, that is competitive.  

However, the investment fee is a bit of a red herring as investment returns are published after the investment management fee has already been deducted.  You should focus on the returns and volatility of the investment portfolio rather than the cost of the investment as these are the variables that actually determine whether your retirement works. 

A living annuity is an income machine that must support you for the rest of your life.  As one in ten of us will live to 100,  retirement could easily stretch to 35 years.

Think back to what the past 35 years have thrown at you: political upheaval, market crashes, currency swings, global recessions, pandemics, technological revolutions. It was not a smooth ride. Yet during that time, you had something working in your favour — promotions, bonuses, annual increases and the ability to earn more.

Now imagine facing the next 35 years without any of that. No salary increases. No career progression. No second chances to rebuild capital after a bad decision. Just your retirement savings, expected to carry you through every market cycle and economic shock that lies ahead.

That is why retirement investing cannot be casual or reactive. It requires a robust, carefully constructed investment plan — one that balances growth and stability, manages risk deliberately, and is designed to withstand decades of uncertainty.

In retirement, volatility matters more than it did during your working years.

When you were accumulating capital, market declines were uncomfortable but temporary. You could wait for recovery. In retirement, you are withdrawing income at the same time. If markets fall sharply and you continue drawing income, you are selling assets at depressed prices. That capital is gone permanently. This is known as sequence of returns risk, and it can quietly derail an otherwise sound retirement plan.

So ask yourself:
• How did this portfolio behave during previous market corrections?
• Could you tolerate a 20% decline in your capital while still drawing income?
• Is there a lower-volatility component to protect near-term income needs?

Often, a sensible living annuity strategy uses a layered approach with part of the portfolio in lower-volatility assets to fund short-term income and part of the portfolio in growth assets to drive long-term inflation-beating returns.  This reduces the risk of being forced to sell growth assets during market stress.

Finally, we return to costs — but in context.  Look at the table below where I compare the returns on a hedge fund and an index tracker fund

At first glance, the hedge fund would immediately be dismissed. A 7.6% fee versus 0.4% looks excessive — even reckless.

But here is the key point: the returns shown above are already declared after fees have been deducted. The real comparison is not about cost in isolation. It is about net returns and risk.

For the long-term growth portion of your portfolio, the index tracker makes sense. Over decades, the strong years (like +52%) can compensate for the weak years (like -18%). Volatility becomes tolerable when time is on your side.

Retirement changes the equation. If you are drawing an income and your portfolio delivers -18% in a year while you are simultaneously withdrawing 5% or 6%, the damage compounds. You are selling units when prices are depressed. That creates sequencing risk — and that is what destroys retirement plans.

In that context, the hedge fund’s smoother return profile (worst year +6%) works for the income-producing portion of the portfolio. Stability suddenly has real value.  The conversation shifts from “What is the cheapest fund?” to “What combination of return and risk gives me the highest probability of my money lasting?”

The real questions you should be asking are:

• Is my drawdown rate realistic given my age and capital?
• Does my portfolio have the right balance between growth and stability?
• Can it reasonably deliver inflation-beating returns over decades?
• Am I comfortable with the level of volatility I will experience?
• What happens if markets fall 15–20% next year?

Retirement success is not determined by who charges the lowest fee.  It is determined by whether your living annuity is structured to deliver sufficient growth, controlled risk, and sustainable income for the rest of your life.

These are not small decisions. They deserve careful modelling — and ideally the guidance of a suitably qualified financial planner.