The best living annuity in South Africa? Flexibility, low fees and making the right choice

A living annuity is a post-retirement investment vehicle that allows you to draw a regular income in retirement while keeping the rest of your savings invested. The main idea behind this product is to invest your savings in a variety of assets with the aim of generating returns that can provide sustainable income and potentially investment growth throughout your retirement years. There are other flexibility and estate planning benefits to a living annuity as well, which we will discuss below. 

Choosing the right living annuity for your retirement years is crucial for long-term retirement income. In this article, we discuss why the investment flexibility of living annuities is a key selling point as well as the importance of low fees. At 10x, we know that your retirement is unique, and we’ve designed our living annuity and it’s underlying funds to help you potentially maximise savings while achieving your ideal retirement lifestyle.  

What is a living annuity vs a life annuity? 

A living annuity is a post-retirement investment vehicle that puts you in control of your retirement years. It is funded by a lump sum transfer from a pension/provident or preservation fund, or retirement annuity upon retirement - currently from age 55 in South Africa. This lump sum amount is then invested in underlying funds, which include a mix of the different asset classes, such as equities, bonds, real estate and cash. As a retiree, you should consider factors such as your risk tolerance, time horizons and financial needs when selecting the fund into which your nest egg is invested.  

With living annuities, you also have to select your drawdown rate for the year. This refers to the regular income that you’ll receive from the living annuity to fund your retirement. You can choose between 2.5% and 17.5% of the invested amount, as legislated by the Pension Funds Act.  

A living annuity is different to a life annuity in a few ways, most notably in the fact that a living annuity is an investment product, whereas a life annuity is purchased from an insurer. With a life annuity, you receive a set income throughout your retirement years, which is guaranteed for the remainder of your life.  

There is, however, much less flexibility with life annuities compared to living annuities, as you are unable to adjust the income drawdown rate; this will remain fixed for the duration of the life annuity. Also, you typically can’t leave your capital to any beneficiaries, which you can do outside of your estate with a living annuity. On the other hand, there is no market risk associated with a guaranteed annuity, as the risk lies with the insurance company.  

Choose the right retirement option: Why flexibility is key  

Flexibility is a pivotal part of what makes living annuities attractive. Being able to adjust factors such as your drawdown rate and asset allocation is important, especially when there are changes to your financial situation or financial needs. The drawdown rate can be adjusted annually before your living annuity’s anniversary date, and you can select a rate of between 2.5% and 17.5% according to your requirements.  

As market conditions fluctuate and your financial situation changes, you may wish to change the underlying portfolios of your living annuity. You can switch between underlying funds to accommodate these changing needs and goals. It is important to ensure that you have a nominated beneficiary on your living annuity, as this will allow you to pass on the residual value of your living annuity to your nominated beneficiary on your passing. 

Such flexibility also comes with risks. If your withdrawal rates are too high or investment returns are lower than expected, you run the risk of potential capital depletion, the last thing you want as a retiree. Understanding your time horizon and risk tolerance is, therefore, incredibly important.  

The role of low fees in choosing the best living annuity in South Africa 

Keeping an eye on the fees that you are paying on your living annuity is vital, as high fees can affect your capital, especially when compounded over the long term. Low fees, on the other hand, allow for more of your returns to be reinvested and add to the potential growth of your living annuity over time. 

Let’s consider a scenario where we compare 3% in fees to 1% in fees. Both seem low, but their impact is worlds apart. Let’s assume an investment period of 30 years, an investment of R100,000, a return of 12% per annum and an inflation rate of 6%, so we can see the effect of high fees on our capital. 

Example 1 (1% Fees): Your real investment value is equal to R398,578.  

Example 2 (3% Fees): Your real investment value is equal to R231,004.   

As you can see in the above example, higher fees can deplete your net investment returns over time. In the above example, the difference of 2% in fees was equal to R167,574 over the 30-year period, over 1.6 times the value of the initial investment. The importance of low fees is clear, as higher fees can potentially lead to significantly less returns. 

10x focuses on transparent and low fees. We follow a single fee structure that decreases the more you invest, allowing for more of your returns to be reinvested and potentially build over the long term. Fees charged by 10x investments are typically less than 1% per annum.  

Understanding Effective Annual Cost (EAC) 

The Effective Annual Cost (EAC) measure was implemented in 2015 by ASISA. The aim behind the EAC was for investors to have a method of comparing the fees and costs they are being charged for their investment products.  The EAC refers to all the costs and fees associated with a particular investment vehicle over one year.  

The fees that you may see charged include advice fees, management fees and administration fees. Always review your EAC before signing any paperwork so that you’re fully aware of what your fees will be in total. In order to maximise your returns, you should generally aim for the lowest EAC possible on your living annuity. A higher EAC can potentially deplete your returns and affect your capital growth over the long term. This useful calculator can help you compare and evaluate the costs associated with your living annuity. 

Inflation and the risk of outliving your money 

Inflation results in a reduction of the purchasing power of your money. Even if you believe you have the best living annuity in South Africa, the risks of inflation impact everyone. Effectively, you aren’t able to buy the same basket of goods and services as you were with a nominal value of money year on year. Inflation is usually around 5% to 6% in South Africa, and when compounded over time, this can result in a significant reduction in the purchasing power of our money.  

It’s important to seek inflation-beating returns for your living annuity. You especially want to ensure that you are matching, or even beating, inflation during your retirement years. If you can beat inflation, you can maintain the same standard of living as you’re used to throughout your retirement years.  

The best way to do this is to ensure that your funds are invested in a diversified portfolio, which includes a mix of the different asset classes: equities, bonds, real estate and cash. This allows you to gain from good market returns in certain asset classes and protect yourself against losses in other asset classes. You structure your portfolio according to your financial needs, investment timelines and risk tolerance.  

Living annuities are considered long-term investments, so by including growth assets, such as equities, in your portfolio, you have the best chance of outperforming inflation. Historically, equities have shown to outperform inflation in the long term. You can also invest funds offshore to further diversify your portfolio and take advantage of any growth which may occur in the international market. This will also provide a hedge against any local market fluctuations or depreciation in the Rand.  

10x gives you the freedom to adjust your underlying investment portfolio as you please by choosing from a range of carefully curated investment funds. You can therefore diversify across asset classes such as equities, bonds, property and offshore investments easily. With a lower risk tolerance, you can go for a fund with a higher allocation to bonds. With a higher risk tolerance, you might consider opting for a fund with a larger allocation to equities. At 10x, you can also invest 100% of your living annuity offshore. To find out more, speak to the experienced and knowledgeable consultants at 10x.  

Sustainable drawdowns: Avoid the pitfalls of drawing down too much 

As mentioned above, a living annuity allows you to adjust your income to suit your ever-changing financial needs and lifestyle. For example, if your expenses have recently increased, you can raise your drawdown rate to increase your income. On the other hand, if you realise that your expenses are lower or your needs are fewer, you can lower your income to preserve your savings instead. You can also decide on how frequently you would like to receive your income, either monthly, quarterly, semi-annually or annually. Changes to your drawdown rate and frequency must be made before the policy’s anniversary date.  

So, you can adjust your drawdown rate annually and select a drawdown rate of between 2.5% and 17.5% per annum. As a guideline, a sustainable drawdown rate is generally considered to be around 4%, to ensure that your capital is not depleted too quickly.  If you can draw less than 4% per annum, then this is advised. In terms of frequency, by withdrawing too much, too early, you are risking the potential growth and sustainability of your living annuity. This is because there is less capital available to generate returns and potentially compound over time. Remember, these are merely guidelines, and nothing can be guaranteed.  

The Golden Equation is a useful framework for keeping your living annuity in check in terms of sustainability. The framework is stated as: Drawdowns + Fees + Inflation ≤ Investment Returns.  

Ideally, you want to ensure that your investment returns are at least equal to your total expenses, which are drawdowns, fees and the inflation rate. By keeping this equation balanced, you are on track to ensure that your funds will sustain you for your retirement years. Once again, there are no guarantees in investments, though, and the golden equation is just a framework to assist.  

Asset Allocation in your living annuity: Finding the right balance 

Asset allocation is a key tool in balancing the risks and rewards of your living annuity. By spreading your funds across the different asset classes, such as equities, bonds, real estate and cash, you are reducing your risk of losses in certain asset classes and setting yourself up to reap the rewards of good returns in other asset classes. You should structure your fund selection according to your financial goals and needs, risk tolerance and investment timelines. If you are more risk-tolerant, with longer time horizons to play with, you may wish to invest a higher percentage of your living annuity in equities. Equities are more volatile, but they have been shown to generate the best returns of the asset classes over the long term.  

If you wish to have more stability and are more risk-averse, you may wish to include more bonds and cash in your portfolio. This will add stability, but the returns may be lower. Living annuities are considered to be long-term investments, spanning 20 to 40 years, so including some equities in our portfolio mix can help maximise returns over the long term. 10x offers a wide selection of funds which have different asset allocations to cater to the different needs and approaches of the investor. 

Within the living annuity ‘wrapper’, there are two Flagship funds: The 10X Your Future Fund and The 10X Income Fund. There are also 3 offshore funds available, as well as a moderate and defensive fund. For example, the Your Future Fund is a multi-asset fund which is more heavily invested in growth assets, equities and real estate. Annualised returns have been at 11.4%. The recommended timelines would be at least 5 years. You can find out more about our funds here.  

Index tracking vs active fund management 

Index tracking refers to a more ‘passive’ investment approach where fund managers aren’t actively looking for the best performing stocks right now. Instead, the performance of an index is matched to try and obtain the same returns as the whole market by using the identical securities. For example, the S&P 500. This investment approach is usually a lot cheaper than active management, as there are fewer costs incurred in the process. As the name suggests, active management is a more ‘active’ process which involves both research and the buying and selling of stocks, all of which incur costs. As data shows, index tracking outperforms active management most of the time.  

At 10x, we make use of index-tracking to keep costs low, combined with a more active approach to asset allocation decisions as part of an investment strategy focused on the long-term. With a straightforward approach and low fees, we always aim to get our clients the returns that they deserve. 

Choosing the best living annuity in South Africa 

When deciding between living annuity providers, there are a few key things to keep in mind. Consider the following factors as you seek out the best living annuity in South Africa.  

1. Low EAC: Make sure you are aware of all fees and costs involved with each service provider before signing up.  

2. Flexible drawdown and investment switching: Be aware of costs and processes involved with adjusting drawdown rates and switching between funds. 

3. Strong track record and transparency: Select a provider that has a good history and name in the industry. 

4. Simple and user-friendly platform: A provider who has an easy-to-use online portal which allows you to access your investment information easily is very useful. 

10x has a strong offering which focuses on low investment costs, a long-term investment approach and aims for superior returns which beat inflation. To find out more, contact our investment consultants. 

The best living annuity in South Africa: Is it the 10X Living Annuity?

Flexibility plays a major role in a living annuity’s appeal, and understanding the control you have over your investments is key to getting the most out of them. Low fees are also incredibly key when it comes to retirement planning and your living annuity. Low fees allow for more of your returns to be reinvested and potentially compound over time, building up your capital. Flexibility allows you to adjust your drawdown rates and asset allocation, and finding the right balance is key.  

Adjusting your asset allocation also allows you to restructure your portfolio according to changing market conditions. By regularly reviewing your living annuity, you can be sure it best suits your current situation and is meeting your financial goals. Researching providers to make sure that you are getting the best living annuity South Africa offers is also of utmost importance. In a nutshell, your living annuity needs to be sustainable and continue to work for you. 

At 10x, we offer low fees, transparent investments and a proven track record of high returns. To learn more about our funds, speak to one of our qualified investment consultants today.