How to choose the right underlying funds for your living annuity

A living annuity is a retirement savings investment vehicle that provides you with an income in retirement while keeping your capital amount invested. You, as the retiree, have flexibility and control over your living annuity, but with this comes with ultimate responsibility for your investments. A key consideration during retirement is ensuring that you have enough funds to last you through the retirement years.  

There are various factors which, as an investor, you are able to track, evaluate and adjust to ensure that your financial needs and goals are on track. The importance of choosing the right underlying funds should not be understated, as their performance can have a knock-on effect on your drawdown rate, your fees, your level of protection against inflation and the returns that you may ultimately be able to realise. 

What is a living annuity?  

A living annuity is a post-retirement investment vehicle that is funded by a transfer of capital from your retirement savings vehicles upon retirement. With a living annuity comes flexibility and control, specifically in terms of your income drawdown and your underlying investment funds. Your income drawdown rate is the percentage of your living annuity capital that you withdraw each year (or every 6 months, quarter or month) as income. You can select your income drawdown rate annually, and you can choose anywhere between 2.5% and 17.5%. You can adjust your drawdown rate annually prior to your living annuity’s anniversary date.  

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You can also select the underlying funds of your living annuity. These funds can be regularly reviewed and subsequently adjusted to fit changing financial requirements and goals over time. As a retiree, you want to choose underlying funds that can help you meet your retirement goals and financial needs. Your living annuity needs to be actively managed, as the income generated is not guaranteed for life, and there is always the risk that funds run out before your retirement years do. This is referred to as longevity risk, a key consideration when it comes to living annuities. 

The importance of choosing the right underlying funds 

Your underlying funds are an important factor in the returns that your living annuity generates. You select underlying portfolios to meet your financial needs and goals, and you therefore have to consider your risk tolerance and time horizon to find a fund that lines up with your needs. Risk tolerance is how comfortable you are with market volatility and inevitable ‘up and down’ market cycles, with your capital potentially losing value at times and then regaining that value and potentially growing again. Your time horizon refers to how long you will need your living annuity to provide you with an income. 

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Key criteria for choosing living annuity investment funds  

When choosing your underlying funds, there are a variety of factors to consider. We will look at these factors in a bit more detail below.  

1. Risk Profile and Time Horizon: If you are a younger and more risk-tolerant retiree with a longer time horizon at hand, you may wish to include a higher percentage of equities in your portfolio. If you are an older retiree who is more risk-averse, you may wish to include a smaller percentage of equities in your portfolio and a greater allocation towards more stable ‘defensive’ assets like bonds.   

2. Income Needs: You may wish to structure your underlying funds in order to cater for your income needs. For example, if you need to draw substantial income from your living annuity, you may wish (for a time, at least) to have a more aggressive portfolio that includes more growth assets, such as equities.   

3. Investment Objectives: As an investor, you need to be clear on your investment objectives. Are you looking for more capital growth, or is capital preservation more important? Different funds will have different goals, so you would want to align your investment with the funds that best match your objectives.  

4. Fund Transparency: Fund transparency is important. When choosing between funds, you would want to make sure that the fund is transparent with regards to previous performance, fees, investment strategy and goals. 

Managing investment risk through smart fund selection 

At 10x, we give you the freedom to adjust and customise your underlying investment portfolio by choosing from a selection of carefully curated investment funds. These funds let you diversify across asset classes like equities, properties, bonds, and offshore investments. 10X has funds to suit a wide variety of retirement outcomes. By diversifying across different asset classes, you can potentially benefit from different economic cycles, or at least, protect yourself better from the impacts of market downturns, which can boost the overall performance of your portfolio.  

For example, equities have historically shown that they can beat inflation in the long term (based on JSE All Share Index Performance versus CPI from 1960 - 2020). Bear in mind that past performance does not guarantee future results. If you invest too much of your portfolio in more conservative assets such as cash and bonds, you may run the risk of inflation outperforming your living annuity returns.  

At 10X, there is a range of strategically focused funds in the living annuity wrapper, each focusing on slightly different long-term outcomes. Each fund is suited to investors with different profiles, allowing you to diversify across the different asset classes available. With 10X, you can even invest your living annuity 100% offshore, which is something many investment managers do not offer. Please note that fund information is correct as of 20 May 2025. 

10X Living Annuity funds 

At 10x, we understand that your retirement is unique, and we have designed our living annuity to help you potentially maximise your savings and reach your desired retirement lifestyle. In the list below, we discuss a few of the funds available with a living annuity. For more information on this, speak to one of our consultants.  

10x Your Future Fund: The 10x Your Future Fund is one of our two flagship funds, designed to deliver cost-effective exposure to a range of different local and international asset classes. The fund has a higher allocation to growth assets such as equities and property. The fund is best suited for investors who want long-term capital appreciation.  

10x Income Fund: The other flagship fund, the 10x Income Fund is constructed to give investors a high level of income and long-term capital stability, with cost-effective exposure to different local and international interest-bearing assets. The fund is aimed at investors with a time horizon of 3 years or longer, as returns may fluctuate over shorter periods.  

10x International High Equity: The 10x International High Equity Fund is designed to generate long-term capital growth via a diversified combination of local and offshore asset classes. The fund allocates 80% of its assets to local and international shares and property, giving investors exposure to global markets. 20% is invested in defensive assets such as bonds and cash to manage risk. The fund is best suited to investors looking to capitalise on international investment opportunities.   

10x Moderate Fund: The 10x Moderate Fund is best suited for investors who want capital growth with a lower level of volatility than a high equity portfolio over the medium to long-term. The fund includes exposure to a comprehensive range of local and international asset classes, with a higher allocation to growth assets (shares and property) than to defensive assets (bonds and cash). Returns may be volatile over the short term, so the recommended time horizon is at least three years. 

You can review our other living annuity funds here.  

Understanding and minimising investment fees 

Fees also play a major role in the potential growth of your living annuity investment. With low fees, long-term growth potential is supported, while high fees can slowly diminish returns over time, potentially reducing the value of your capital. Lower fees allow for more of your returns to be reinvested, which can allow compounding to work more effectively in your favour. Fees may include:  

Admin fees: There is always administration involved with the running of a fund; administration costs are related to admin tasks, such as reporting or tax. 

Management fees: These are the fees charged for managing the fund on behalf of a client. 

Advisor fees: The fees which an advisor charges for the investment advice and guidance they give and the work they do relating to your investments.  

The Effective Annual Cost (EAC) is a metric that was introduced in 2015 by ASISA. It is a way in which you, as an investor, can be sure of the fees and costs involved with your investment over a one-year period of time. You can also use the EAC to compare offerings from different service providers and the charges associated with each. All things being equal, a higher EAC would allow for less of your potential returns to be reinvested, and a lower EAC would allow for more of your potential returns to be invested and compound over the long term. Naturally, the EAC would be just one factor to consider when evaluating investments.

Try out this useful free EAC calculator to determine your existing fees. If possible, you should consider choosing a service provider with transparent and low fees. This allows you to maximise any potential growth of your living annuity. 

Let’s look at an example to explain the effect of high fees on your living annuity. We will be comparing fees of 3% and 1% and assume constant returns (although real returns may vary).  

Let’s also assume the following: 

• 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. 

In the first example, the real investment value rises to R398,500, while in the second example, it only reaches R231,000. This means that over a period of 30 years, 2% in fees was equivalent to R167,500. We can clearly see the value of low fees. Note that this example is for illustrative purposes only and actual results may vary. To learn more about how fees can impact your returns, take a look at this blog.  

10X offers a low-fee living annuity through the use of index-tracking methodologies. To find out more about the 10X living annuity and the associated fees, follow this link.  

Sustainable drawdowns from your living annuity: Aligning income with growth  

Your drawdown rate is also a major factor when it comes to your living annuity, as you’ll need to select a sustainable drawdown rate to help ensure the longevity of your capital. A good rule of thumb for a potentially sustainable drawdown rate is 4%, allowing for more of your capital to remain invested and potentially grow over the long term. We’ve got a great article on the 4% drawdown rule over here. 

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Remember, your drawdown rate may be adjusted each year, and you should do so in accordance with your income needs. You can choose to receive these income payments yearly, biannually, quarterly or monthly, depending on your requirements. As an investor, your aim should be to select underlying funds that can generate the returns you need for a sustainable drawdown rate.  

Index tracking vs active management for living annuities  

Index-tracking refers to the tracking of a particular benchmark to generate returns that are similar to those of the benchmark. This is unlike active management, where a fund manager aims to pick the right stocks in an effort to obtain the best returns possible. Index-tracking is potentially more cost-effective as there are fewer costs incurred with this process. Active funds, on the other hand, may incur more costs due to activities such as research, analysis and trading in an effort to reach better returns. This may then result in potentially higher total costs and higher fees for the investor.  

As data from the SPIVA Scorecards suggests, index-tracking investments outperform active managers the majority 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 years ending 31 December 2024.  

These scorecards use net-of-fees returns for actively managed funds, excluding costs not directly related to the manager's service. 10X makes use of index tracking in an effort to keep fees on the lower for our clients and thereby maximise returns. Our strategy is geared towards the long-term to produce the investment and retirement outcomes that you deserve. 

Conclusion: Getting your living annuity right from the start  

As you can see, it’s important to carefully select your underlying funds to ensure that they cater for your financial needs and goals. By carefully selecting funds with an asset allocation and investment strategy in alignment with your needs, you can help protect your hard-earned capital against the effects of inflation and fees while finding the balance that you need between capital preservation and growth. The importance of regularly reviewing your portfolio selection should be emphasised in order to ensure that your changing needs over time are being met, as well as catering to the current market conditions.  

At 10X, we simplify your investments with low fees, a superior track record a straightforward but effective investment approach geared towards the long-term. To learn more about how we can deliver exceptional long-term returns at a fraction of the cost, speak to one of our consultants today!