How fees can impact your living annuity income

A living annuity is a flexible retirement investment savings vehicle which gives retirees the freedom to draw an income while keeping accumulated savings invested, allowing for continued potential growth. A living annuity is funded by retirement savings such a pension or provident fund, or a retirement annuity, which is possible from age 55 onwards in South Africa.  

Living annuities offer great flexibility, allowing you to select your drawdown rate each year. This is the percentage of your living annuity that you will receive as income. The fees that you pay on your living annuity play an important role in the growth of your capital over time, with higher fees reducing the returns that you will have available to reinvest and potentially grow over time. With high fees, you may have to keep your income on the lower end to keep your living annuity sustainable for the duration of your retirement.  

 At 10X, we believe in low fees and superior returns. In this article, we will take a deeper look at the effect of fees on your living annuity retirement income and how low fees can maximise the potential growth of your living annuity.  

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Understanding how living annuities work  

A living annuity is regarded as a long-term investment, typically lasting between 20 and 40 years. Your savings are invested, and you can withdraw an income based on your chosen drawdown rate. Unlike a life annuity, which guarantees a fixed income for life, a living annuity allows you to adjust your withdrawals, manage your investment portfolio, and pass on capital to beneficiaries outside of your estate.  

The primary aim is to invest your savings in a diversified selection of assets in order to generate returns that can provide you with a sustainable income throughout retirement. Ideally, the returns generated by the living annuity should cover your selected drawdown rate, as well as fees and inflation, to uphold sustainability in the long term.  

The drawdown rate is adjustable and can be modified annually before the policy anniversary, allowing you to make changes to reflect your existing financial and living situation. The permitted range for the drawdown rate is between 2.5% and 17.5%. Additionally, as a retiree, you can choose the payment frequency, which may be annually, semi-annually, quarterly, or monthly, according to your preferences.  

The appeal of living annuities lies in their flexibility, as you have much more freedom than with guaranteed annuities. Of course, there is a risk associated with this, too. One of the challenges that you will face is choosing a sustainable drawdown rate. The fees that you pay on your living annuity have a role in your drawdown, and may impact the sustainability of your retirement income. 

 Living annuity fees  

Fees play a huge role in the potential growth of your investment. You should, therefore, always be aware of the different fees you are paying. The typical fees that you may see deducted from your living annuity are the following: 

Administration fees: These are the fees charged for the administration of the fund. This will relate to activities such as compliance, reporting and taxation. 

Advisor fees: These are the fees which are charged by an advisor. You may see both an initial and an ongoing fee being charged. 

Management fees: These are the fees charged for the management of the fund. 

Other fees: These may be fees such as early exit penalties (applicable to certain products). 

High fees may have the effect of reducing the potential growth of your living annuity over time, as there are effectively less returns available to be reinvested and to potentially compound over time, potentially leading to reduced income. Lower fees, on the other hand, mean that there are more returns available to be reinvested and to potentially grow over the long term, which may enable a higher, sustainable drawdown rate.

 While 3% may appear modest, when compounded over time, this can potentially impact the growth of your capital. Let’s look at an example to illustrate the effect that high fees may have on your living annuity. We’ll compare fees of 3% and 1% to get a clear idea of how fees may impact growth. Let’s assume the following factors: 

• Investment period of 30 years 
• Investment of R100,000 
• Return of 12% per annum 
• An inflation rate of 6% 

Example 1 (1% Fees): Real investment value is approximately R398,500. 

Example 2 (3% Fees): Real investment value is approximately R231,000. 

As this example illustrates, by choosing a product with lower fees, you allow more of your returns to stay invested and potentially grow over the long term. With higher fees, you may have to select a lower drawdown rate to keep your retirement income sustainable. You can learn more about the importance of low fees here. Note that this example is for illustrative purposes only, and actual results may vary. 

10X has a transparent and low fee structure, charging a single fee of less than 1% for most products, which reduces with the more that you invest. To view our most up-to-date fee information, please visit our website. In the following sections, we’ll look at Effective Annual Cost and dive deeper into how fees can impact your retirement income.  

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EAC: The true cost of investing  

The Effective Annual Cost (EAC) is a standardised measure that was introduced in 2015 by ASISA. This metric shows the total costs and fees associated with owning an investment over a one-year period of time. As the investor, you can see all costs that are being charged on your investment and then use this information to compare with the EAC being charged by other service providers.  

All things being equal, a higher EAC would result in there being less returns available to reinvest and compound over time, whereas a lower EAC would mean that there are more returns available to be reinvested and allowed to potentially compound over the long term. The EAC consists of administration fees, advisor fees, management fees and other fees such as early termination fees. When choosing a service provider, the EAC is just one factor to take into consideration. 

It’s important to differentiate between the EAC and TER of an investment. The TER is the Total Expense Ratio of an investment. This means the total costs associated with the management and operation of an investment fund. These costs would include management fees, audit fees, custodian fees, legal fees and operational expenses, but it does not include all advisor and transaction charges.  

Many retirees may not be aware of the EAC that they are being charged on their living annuity. As an investor, you should be able to find your EAC on your living annuity statement. Otherwise, you can request your EAC from your service provider. 10X offers a useful EAC calculator as a part of their online suite of tools. You can find it here.  

This allows you, as the investor, to compare all fees and costs found with a 10X product, and this information can be used to compare with the fees and costs associated with your current service provider.  

How fees can impact your drawdown rate 

The Golden Equation (Investment Returns ≥ Inflation Rate + Fees + Income Drawdown) is a framework created to assist with the management of your living annuity by looking at the inflation rate, drawdown rate and the fees that you are paying. In order for your living annuity to be potentially sustainable, your investment returns should be equal to or higher than the sum of your drawdown rate, the inflation rate and the fees which you are paying on your living annuity.  

High fees will reduce the real returns that you have available to fund the income that you draw from your living annuity. This, coupled with a higher drawdown rate, can result in your living annuity depleting quicker than would otherwise be the case with lower fees and a lower drawdown rate. The effect of this is even more pronounced when compounded over the long term.  

Minimising fees may help extend the life of your retirement savings while allowing you to draw a high enough income to meet your financial needs. Your fees and the drawdown rate you select can be controlled to a certain extent, whereas inflation is inevitable and cannot be controlled, but must be considered.  Lower fees mean you can potentially set a higher drawdown rate without risking your capital depleting too quickly.  

The Golden Equation is a useful framework to make use of when structuring your living annuity. Keep in mind that investment returns are not guaranteed and that these can fluctuate over time. 

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Index tracking vs active investing: Which is best for you?  

Index tracking refers to the tracking of a particular benchmark index with the aim of obtaining returns that are similar to that particular benchmark, such as the S&P 500. Active investing, on the other hand, is where a fund manager has the role of trying to pick the right stocks with the aim of obtaining the best returns possible. Index tracking is often more cost-effective as there are fewer overall costs involved.   

Active investing may incur more costs due to the activities involved, such as research, analysis and trading. This could then result in higher fees, which may be passed on to you as the investor. Data from the SPIVA Scorecards suggests index tracking outperforms active management most of the time. According to the latest SPIVA South Africa Scorecard (as of 31 December 2024), 60.84% of South African actively-managed equity funds underperformed the S&P South Africa DSW Capped Index over the ten-year period ending 31 December 2024.  

10X makes use of an index tracking investment strategy to keep costs low, while also using a more active approach to asset allocation. Our investment strategy takes a long-term view and focuses on getting desirable retirement results for our clients. To find out more about our investment strategy and how we can keep fees low, click here. 

Using asset allocation to your advantage to optimise returns 

Another way to make sure that you optimise returns and maintain a sustainable income throughout retirement is to diversify your investment across different assets. Asset allocation refers to the mix of assets in which your living annuity savings are invested. As an investor with 10X, you can adjust your underlying investment portfolio by choosing from carefully curated funds, each with a different asset allocation geared towards different investor profiles. This is usually a mix of equities, bonds, real estate and cash, depending on your risk tolerance, income needs and timelines involved.  

You ideally want to maximise the returns of your living annuity to draw these returns as income throughout your retirement years while keeping as much capital as possible invested to grow and potentially compound over time. This is especially the case if you have a higher drawdown rate, which needs to be sustainable throughout your retirement years.  

Equities are the most volatile of the asset classes but also have the potential to generate the best returns over the long term. Bonds and cash add stability to the profile, but the returns realised are generally lower than you may obtain with equities.  

As a living annuity is viewed as a long-term investment, you would ideally include some equities in your portfolio, depending on your risk tolerance levels. You may also wish to spread your investment across the asset classes in order to spread your risk. This allows you to potentially gain from any good market returns in certain asset classes while also mitigating against any volatility in other asset classes. You may also wish to further diversify offshore, which lets you potentially take advantage of any good returns in the international market, too.  

10X offers a living annuity that may be 100% invested offshore, which many other service providers do not have as an option. To find out more about the 10X living annuity, click here.  

How to minimise fees and optimise drawdown sustainability  

We can see how fees may impact your living annuity income, but there are clearly some steps that you can take to minimise fees and optimise the sustainability of your living annuity. Let’s have a look at these steps:   

1. Make sure to request the EAC from any potential service providers before signing up. 
2. Look to choose low-fee providers, as this allows you to have a higher drawdown rate while keeping it sustainable. 
3. Regularly review your drawdown rate and adjust according to your changing needs and income requirements. 

Lower fees will potentially mean more available capital, which means your living annuity will be more sustainable in the long run. By keeping fees low, you have more freedom to select a higher drawdown rate that remains sustainable throughout your retirement years. 

Conclusion: Living annuity fees

Retirees may often overlook fees, but the importance of minimising fees should not be neglected. Lower fees allow for more returns to be reinvested, and this will potentially mean greater growth of your living annuity as the returns potentially compound over time.   Being aware of your EAC is a great first step in managing the costs involved with your living annuity. Always make sure that you’re fully aware of all the fees that you are paying so you can make an educated decision regarding your investments going forward.   

At 10X, we offer superior returns, low fees, and exceptional service. If you have any queries or need help with your living annuity, be sure to speak to our helpful and knowledgeable investment consultants. Get in touch today to secure your future!