Best Retirement Annuity South Africa: Choosing The Right RA For Long-Term Success
Planning for retirement is a necessity for everyone, and choosing the best retirement annuity South Africa has to offer is one of the most important financial decisions that you can ever make. The choices that you make today, particularly those surrounding fees, asset allocation and investment strategy, can be the difference between a comfortable retirement and one limited by poor planning.
Long-term retirement outcomes are driven by a range of different factors. In this guide, we’ll discuss how to choose the best retirement annuity in South Africa, the key controllable factors driving RA performance, and the value of investing with 10X.
What is a Retirement Annuity?
A retirement annuity, or RA, is a tax-efficient investment vehicle designed to assist South Africans in saving for retirement. They are particularly useful for self-employed individuals who do not have an employer-sponsored pension or provident fund. Contributions to a retirement annuity are tax-deductible, up to 27.5% of taxable income within an annual limit of R350,000.
A major advantage of retirement annuities is that investment growth inside the annuity is tax-free, which allows your savings to potentially grow significantly over the long-term through compounding. Your savings are preserved until at least retirement age, set at 55 in South Africa, except in limited circumstances.
Consistently contributing to a retirement annuity helps to create a financial foundation for retirement by using the power of compound interest. In the long term, the returns generated on your savings are reinvested, which can lead to potential significant investment growth.
All RA investments are regulated under Regulation 28, which limits concentration risk and promotes diversification to protect investors. Unlike discretionary investments, retirement annuities are specifically designed to support long-term retirement income, rather than short-term access.
Best Retirement Annuity South Africa: Reviews
10X has some of the best retirement annuity options available in South Africa, offering clients a variety of carefully curated funds (at very competitive rates), each suited to different investor profiles. For investors, the quality of a retirement annuity depends less on branding and more on how it is structured.
Investors who are reviewing retirement annuities should consider the following criteria:
Investment Strategy: Is the investment strategy evidence-based, diversified and disciplined? Or is it reliant on active management and market timing?
Fees: Even slight differences in fees can reduce your retirement capital by a significant amount over the next 30-40 years. Fees are one of the strongest predictors of long-term outcomes, so if possible, look for a provider who charges low fees.
Asset Allocation: Do you have the freedom to choose an asset allocation that aligns with your investor profile?
Transparency and Flexibility: Hidden costs can be incredibly frustrating for investors. Always ask if you can clearly see what you’re paying, how your money is invested, and how decisions are made.
Best Retirement Investments South Africa
Your retirement annuity is merely a wrapper, but the real driving force behind performance is the underlying investment portfolio. At 10X, you have the freedom to choose from a selection of carefully curated investment funds, each with a different asset allocation and suited to different investor profiles.
The best retirement investments in South Africa tend to share common characteristics such as broad diversification across asset classes, exposure to both local and offshore markets, a focus on long-term returns, and keeping costs as low as possible.
Understanding Asset Allocation
Asset allocation is the primary driver of retirement and investment outcomes. This refers to how your money is split between equities, bonds, property, and cash. Investors can also choose to invest offshore, up to a limit of 45% as stipulated by Regulation 28. As mentioned, 10X lets you choose from a selection of carefully curated investment funds, which allows you to diversify across different asset classes.
By diversifying across different asset classes, you can potentially benefit from different economic cycles, which will improve the performance of your portfolio. Equities have historically delivered returns above inflation by around 7% annually over long periods (based on JSE All Share Index performance versus CPI from 1960-2020), but past performance does not guarantee future results. Bonds and cash tend to offer more stability and reduce volatility. Offshore investments can also help you diversify beyond just the local economy, which may in turn provide some protection against local currency fluctuations.
At 10X, our approach to asset allocation is to strategically focus on long-term returns. We understand that asset allocation plays the biggest role in the performance of your retirement annuity, as seminal research from Brinson, Singer and Beebower indicates.
Remember, under Regulation 28, retirement annuities must limit equity exposure, limit offshore exposure and maintain diversification across asset classes. The challenge comes in balancing growth and risk based on time horizon rather than short-term market conditions.
Generally, a sound retirement strategy would involve higher equity exposure early in your career, careful and gradual risk reduction as you begin to approach retirement, and consistent rebalancing during reviews rather than emotional reactions to markets.
Who Should Consider a Retirement Annuity?
Anyone who wants to build towards a potentially financially secure retirement should consider a retirement annuity. RA's are particularly suitable for self-employed individuals, freelancers and business owners, employees who want to supplement employer retirement funds, and investors seeking long-term, disciplined retirement savings.
What is a Good Amount to Retire on in South Africa?
In South Africa, experts advise that you generally need around R4.5M to R7.5M to retire comfortably in South Africa. This is based on some common rules of thumb for those earning around R300,000 per year.
Perhaps a more widely applicable method is to multiply your expected monthly retirement needs by 300. You can also calculate your target as 15 to 20 times your final annual salary. You can determine the exact amount by looking at your individual needs, lifestyle and health expenses. A personalised financial plan is always key to getting the most out of retirement.
Some factors to consider include healthcare costs, lifestyle and travel costs, property and utilities costs, and any other personal financial needs. Private healthcare can be a significant expense in retirement, and medical inflation is often high. Your lifestyle and travel needs will also directly influence how much you need. The cost of housing and monthly expenses like groceries may vary, depending on where you’re based and your choices.
Is a Retirement Annuity Worth it in South Africa?
Yes. A retirement annuity is definitely worth it in South Africa, especially for those who do not have an employer-sponsored pension or provident fund to rely on. A retirement annuity gives you access to tax savings and allows you to build towards a potentially secure financial future. Your contributions to a retirement annuity are tax-deductible, and the returns you earn while invested are tax-free.
What is the Tax-Free Retirement Income in South Africa?
When you retire, the standard tax-free lump sum that you can take from your retirement savings at that time is R550,000, if we assume no previous withdrawals have taken place. However, in South Africa, extra retirement savings added over and above the R350,000 per year tax-free limit are added to a ‘disallowed contributions pool’ (that capital is ‘disallowed’ in the sense that you do not get tax back on it immediately). When you draw income from your living annuity, you won’t be taxed on it until the amount in that disallowed contributions pool has been worked through.
What is Better Than an Annuity for Retirement?
A retirement annuity is one of the safest bets when it comes to retirement planning. However, isn’t your only choice. Other options, such as tax-free savings accounts, preservation funds, employer-sponsored pension and provident accounts, and other investments you may have, can all contribute towards a secure retirement.
When you retire, you must use savings from a pension/provident fund, preservation fund or retirement annuity to purchase either a living annuity or a life annuity – in that sense, there is no ‘better’, because you are obligated by law to choose one or a combination of the two. You have more freedom with tax-free savings accounts, unit trusts and other savings vehicles.
How Much Do You Get Back from SARS For a Retirement Annuity?
If you invest in a retirement annuity, the size of your refund depends on how much tax you pay on your income. For example, if you invest R1,000 and your tax rate is 25%, you will get the full 25% returned. So, your investment of R1,000 essentially only costs you R750. This is one of the major advantages of retirement annuities.
What is a Disadvantage of a Retirement Annuity?
While retirement annuities come with plenty of advantages, there are some limitations to be aware of. For example, some retirement annuities, especially those that involve active management investment strategies, may incur high fees. There is also a lack of flexibility and liquidity, as access to your savings is restricted until retirement age, making it more difficult to use the money for emergencies. The advantages of retirement annuities, however, far outweigh the disadvantages.
Is an RA Worth it in South Africa?
Yes. In South Africa, an RA can help you pay less tax as your contributions are tax-deductible within certain limits. As an example, imagine you’ve earned a salary of R400K over a tax-year, and you contributed R60K to an RA. You will only be taxed on the R340K, not the R60K in RA contributions.
Cheapest Retirement Annuity South Africa
Investors searching for the cheapest retirement annuity in South Africa are generally looking for RA options with low fees and no hidden costs. While the wording may not be perfect, the goal is to minimise the long-term drag that fees place on retirement outcomes. Fees are one of the few variables that you, as an investor, can control with certainty.
10X’s approach is built around transparency and the brief that fees should be justified by clear, measurable value. For most of our retirement products, we charge fees of 1% or less, and you won’t have to worry about any unexpected or hidden costs popping up. The 10X Retirement Annuity is designed to do less of what does not work and more of what does, so our clients can benefit from long-term growth and satisfactory retirement outcomes.
How Fees Impact Retirement Outcomes
Fees are often mistakenly overlooked by investors, but they can have a major impact on the real value of your retirement outcomes. Fees are underestimated because they are often small percentage amounts that do not appear to have a big impact in the short-term, but over time, they can have a significant impact.
When fees are low, they support long-term growth potential, but on the contrary, high fees reduce returns and affect the overall value of your retirement savings. High fees also compound over time, potentially diminishing your returns and reducing your capital. On the other hand, lower fees mean that more of your returns can be invested, which allows compounding to work in your favour, rather than against you.
Minimising fees can help extend the life of your retirement savings, which supports a potentially steady income throughout your retirement. Fees are one of the few factors which we can control, so keeping them as low as possible is important.
Let’s take a look at an example to illustrate the impact of fees. We’ll compare fees of 1% and fees of 3%, assuming the following:
- Investment period of 30 years.
- Initial lump sum investment of R50,000.
- Monthly contributions of R2,000
- Return of 12% per annum.
- An inflation rate of 6%.
The resulting investment value at the end of the term would be:
- Scenario 1 (1% fees): The real investment value is around R1.8 million after the 30 years.
- Scenario 2 (3% fees): The real investment value is around R1.3 million after the 30 years.
We can see how just a small difference in fees can lead to major differences in retirement outcomes. Note that this example is for illustrative purposes only and real results may vary. You can learn more about fees here.
Best Retirement Annuity South Africa: Calculator
A retirement annuity calculator is a great practical tool for investors to use. It can help you understand how decisions translate into outcomes over the long term. A strong calculator lets you model monthly or annual contributions, adjust expected returns and inflation, look at the potential impact of fees, and estimate your retirement capital and income. As part of our online suite of free tools, 10X has an incredibly useful retirement annuity calculator that you can use to make more informed decisions regarding your future.
How to Use a Retirement Annuity Calculator
To get the most out of this practical tool, you must know how to effectively use it. To use a retirement annuity calculator properly, set a realistic retirement age, use conservative return assumptions, include all fees, adjust for inflation and focus on income replacement, not just lump sums. The results should be seen as a planning guide, as nothing can be guaranteed when it comes to investments.
Best Retirement Annuity South Africa: Why Choose 10X?
For the best retirement annuity South Africa has to offer, consider the value of choosing 10X. The question that you should ask yourself is not which provider promises to deliver the highest returns, but which one is structured to deliver the best chances of long-term retirement success.
We understand that retirement outcomes are driven far more by costs, asset allocation and investor behaviour than by market timing or stock selection. We focus on controlling the factors that investors can actually influence, so you can enjoy better retirement outcomes.
The 10X Investment Strategy
At 10X, we use an index-tracking investment strategy to keep costs low, combined with a more active approach to asset allocation decisions. Our investment strategy is geared towards long-term returns that produce the investment and retirement outcomes that our clients deserve.
While active management strategies often come with high fees for stock-picking expertise that rarely delivers sustainable performance, our more effective middle path uses the efficiency of index investing while respecting valuation principles. This is seen as a “buy to hold” approach.
The idea is to construct portfolios today as if you’re buying to hold for the next five years. As an investor, it’s important to regularly reassess forward-looking expectations based on changing valuations. You can then make adjustments when the 5-10 year outlook shifts. Our approach strikes a balance between passive investing and hyperactive trading.
Best Retirement Annuity South Africa: Final Thoughts
In South Africa, choosing the best retirement annuity is about making informed decisions and sticking to them over time. No provider can control markets or guarantee outcomes, but when you focus on what you can control, you improve your chances of success. This means keeping fees low, maintaining a diversified asset allocation and avoiding unnecessary complications or emotional decision-making.
Your retirement annuity should be structured to work quietly and consistently behind the scenes, where compound interest can work in your favour and help you build towards a comfortable retirement. At 10X, we reflect this philosophy by focusing on evidence-based investing and charging low fees, creating an environment where long-term retirement outcomes are given the best chance to succeed. To learn more about the 10X retirement annuity, or if you have any questions for our investment consultants, get in touch today!