Retirement annuity checklist: Questions to ask before opening an RA

A retirement annuity is a product designed for long-term, disciplined investing to save for retirement. It provides significant tax benefits and can be a crucial part of your retirement savings. However, understanding the rules around retirement annuities, such as access, taxes, fund choices, asset allocation, and fees, is essential before you start. This article will explore key topics including tax, RA contributions, access, the Two-Pot System, fees, asset allocation, Regulation 28, 10X fund options, and how 10X supports you as a 10X retirement annuity investor.

Question 1: Why am I opening a retirement annuity and what are the tax benefits?

A retirement annuity (RA) is a retirement vehicle used to build your long-term retirement savings while also taking advantage of the tax benefits on offer. It is a product that may be particularly useful if you don’t have an employer-sponsored pension or provident fund or if you are looking for another way to supplement your retirement savings.

An RA has limited withdrawal rights, so keep this in mind when contributing. Nonetheless, it can be a key part of your retirement strategy, especially when combined with other financial products.

Growth within your RA is not subject to tax; therefore, you won’t pay income tax, dividends tax or capital gains tax on the investment growth. Contributions to your RA are also tax-deductible, subject to applicable limits. For the 2026/2027 year, the limit is 27.5% of your taxable income. This is capped at R430,000 per annum.

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Question 2: How much can I afford to contribute?

When it comes to RA contributions, you should focus on affordability and sustainability. This will not always be the maximum amount you can afford at any given time, but rather an amount you can contribute consistently over time.

RA contributions are flexible, and you can adjust them based on changes in income, expenses, and financial goals. Consider setting up a regular debit order or making lump-sum payments when you can. Make sure to meet the minimum contribution requirements set by your provider. Generally, it’s a good idea to increase your contributions as your income grows. You may also want to consider adding bonuses and supplementary income to your RA. However, remember that an RA has limited access, so it's important to maintain other savings for emergencies.

Question 3: How does the Two-Pot system affect my RA?

The Two-Pot Retirement System was implemented in South Africa in September 2024. This system governs contributions and withdrawals for retirement products, such as RAs.

Contributions are split among three components: savings, retirement, and vested. Two-thirds of all contributions will be allocated to the retirement component, and one-third to the savings component. The vested pot is for all accumulated savings prior to 2024, and the previous rules that were in place before the Two-Pot system will apply to this component.

When it comes to withdrawals, you can withdraw from your savings pot once per year, for a minimum amount of R2,000. This will be taxed at your marginal tax rate, and an administration fee will also apply.

An RA should not be seen as a regular savings account to dip into. It should instead be seen as a long-term retirement savings vehicle for your retirement years. Please check the latest FSCA guidance for the most up-to-date information on the Two-Pot system.

Let’s have a look at two examples to help illustrate how the Two-Pot System works:

Example 1: If you contribute R9,000 to a qualifying retirement fund after implementation, approximately R3,000 is allocated to the savings component and R6,000 to the retirement component. If there is any withdrawal from the savings component, this will reduce the amount available to potentially grow and compound for retirement.

Example 2 (Including vested component): Let’s assume you had R600,000 saved in a retirement fund before 1 September 2024. Upon the introduction of the Two-Pot Retirement System, 10% of this amount, capped at R30,000, was transferred to the savings component as seed capital. The remaining R570,000 would have stayed in the vested component and continued to be governed by the old rules. If you then contribute R9,000 after implementation of the Two-Pot System, R3,000 will be allocated to the savings component and R6,000 to the retirement pot.

Question 4: What fund options are available?

You also need to decide how to invest your RA capital in the market. As a 10X investor, you don't have to select individual shares, bonds, or properties. Instead, you can choose from various diversified 10X investment funds. Each fund features a set mix of asset classes and is tailored for different types of investors, risk levels, and investment horizons. You should pick the fund that best matches your financial goals, timeframe, and risk tolerance. Typically, the asset classes include equities, real estate, bonds, and cash.

Equities are usually incorporated in a portfolio with the aim of getting long-term capital growth and the potential to earn inflation-beating returns. You will also get exposure to companies and economic growth, but this may also bring with it market declines. It is common for there to be fluctuations in value over the short term. Equities may be better suited to investors who are comfortable with some risk in their portfolios and have longer investment time horizons.

Bonds are generally more stable than equities, but they can also come with some risk. They may also provide income, diversification, and some stability in a portfolio. You may find that bond values can be affected by changes in interest rates, inflation expectations and the ability of the issuer to repay its debt. They are considered to be more conservative, but they may still produce some good returns.

Real estate has the potential to provide some good long-term growth. It will provide you with exposure to real assets and economic activity in your portfolio, while also providing income through distributions and rentals. Listed property can be volatile and may be affected by factors such as interest rates, economic conditions, and occupancy levels, amongst others. Real estate may also be a good hedge against inflation.

Cash is thought to be the most liquid and stable of the asset classes. It may be more stable than equities or real estate. You may, however, see cash returns struggling to keep pace with inflation over long periods, and this may affect purchasing power.

Your asset allocation should ideally match your risk profile, investment timelines and long-term financial plans and goals. Research by Brinson, Singer, and Beebower underscores the importance of careful consideration of your asset allocation. You will also need to consider Regulation 28 of The Pension Funds Act. This affects retirement products and limits your portfolio to 75% exposure to equities and 45% exposure offshore.

At 10X, our range of well-diversified, Regulation 28-compliant funds mean you can select a fund well-suited to your investor profile and long-term financial goals. Please see our fund page to find out more.

Question 5: Which 10X fund may suit my timeline?

10X Your Future Fund

The 10X Your Future Fund is one of the 10X flagship funds. This is a multi-asset, high-equity fund which has a higher percentage of growth assets. The fund will also include some exposure to local and international markets.

The fund is suitable for investors with a higher tolerance for short-term market volatility and an investment timeline of 5 years or more. The goal is long-term capital growth, which may entail some short-term volatility.

Fund returns (all returns greater than 12 months are annualised)

Source: Fund Fact Sheet

10X Moderate Fund

The 10X Moderate Fund is a medium-equity fund. The fund is multi-asset and includes a greater percentage of growth assets compared to defensive assets. There is also less exposure to equities than is the case with a high-equity fund.

The fund includes both local and offshore investments and works well with an investment time horizon of 3 years or more.

Fund returns (all returns greater than 12 months are annualised)

10X Defensive Fund

The 10X Defensive Fund is a multi-asset, low-equity fund that includes a larger allocation of defensive assets when compared to growth assets.

The fund is suited to investors who are seeking stability as well as growth. The ideal investment period is usually between one and three years or more.

Fund returns (all returns greater than 12 months are annualised)

10X Income Fund

The 10X Income Fund invests mainly in a diversified range of local and international interest-bearing assets. The goal is to generate a high level of income as well as capital preservation over the long term.

The fund is suited for investors with an investment horizon of three years or more. Both value and returns may fluctuate despite being income-focused

Fund returns (all returns greater than 12 months are annualised)

10X Money Market Fund

This 10X Money Market Fund is the most conservative of the fund options. It includes a range of short-term money market instruments and short-term bonds. The goal is to generate interest income, provide liquidity and preserve capital. The fund is best suited to investors who would like to minimise risk and require short-term stability.

Fund returns (all returns greater than 12 months are annualised)

Question 6: What fees will I pay?

Before starting an RA, it is important to consider the fees that you will be paying. Fees may seem minimal, but these will compound over time, and this may have an effect on the potential growth of your RA over the long term. Even modest fees can have a major impact on retirement outcomes. Some of the usual fees that you may see charged are as follows:

• Administration fees: These are the fees charged for the administration tasks related to the fund. For example, compliance, reporting and tax.
• Advice fees: There may be both initial and ongoing fees charged if you are making use of a financial advisor.
• Management fees: These are the fees charged for the management of the fund.

Let’s have a look at the effect that fees may have on your RA when compounded over 30 years. We will assume the following information for our example:

• Starting capital: R0
• Monthly contributions: R2,000 at month end
• Investment period: 30 years
• Gross annual return: 10%
• Annual inflation rate: 5%
• No withdrawals are made during the investment period, and contributions remain fixed

Scenario 1 - 1% fees: After 30 years, your RA will grow to an estimated inflation-adjusted value of R1.3 million.

Scenario 2 - 3% fees: After 30 years, your RA will grow to an estimated inflation-adjusted value of R971,000.

We can see how small differences 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 find out more about the effects of fees in this article covering the math. Here are a few important terms that you may see on your investment statement:

• Total Expense Ratio (TER): Ongoing expenses of an investment fund, calculated in accordance with the applicable standard. (A way to compare the operating costs of similar funds, but it is not the final cost)
• Total Investment Charge (TIC): The total investment charge, which combines the TER with transaction costs within the fund. (A way to compare the full cost of the investment portfolio itself)
• Effective Annual Cost (EAC): An annualised estimate of the impact of product, investment management advice, administration fees, and all other applicable charges.

The EAC gives investors a standardised way to understand the full cost of holding an investment over time. It was introduced by ASISA in 2015. The EAC combines various charges linked to an investment into a single annual percentage. Assuming all other factors are equal, a lower EAC generally means that a larger portion of your returns are reinvested and available to potentially earn returns. A higher EAC may place greater pressure on net returns as fees accumulate over time. Costs should be considered in isolation. 10X focuses on simple, low-cost and transparent fees. Please explore our products to find out more about product fees.

Question 7: How often should I review my RA?

You generally aim to review your RA once per year. This gives you an opportunity to check whether your RA still aligns with your long-term financial goals, contribution plans and retirement timeline. Your income, expenses, risk tolerance and retirement expectations may change over time, so your retirement annuity shouldn’t be something you set up and forget about. An annual review can also help you assess whether your fund selection is still appropriate.

For example, if you are getting closer to retirement, you may want to review whether your current asset allocation still suits your investment horizon. If your income has increased, you may also want to consider whether you have room to increase your monthly contributions or make an additional lump-sum contribution.

Let’s look at some questions you may like to ask when reviewing your RA:

• Are contributions still manageable and sustainable?
• Do you have capacity to increase your contributions?
• Are the fees you are paying affordable?
• Does your fund selection match your investor profile and long-term financial goals?
• Is your beneficiary information up-to-date and correctly reflecting your wishes?
• Has your expected retirement date changed?
• Are you making full use of the tax benefits available to you, within the applicable limits?

How 10X can support RA investors

We follow an index-based investment strategy alongside a more active approach to asset allocation. We provide investors with a selection of funds that span various asset classes, including both local and offshore investments. Our fee structure is straightforward, transparent, and easy for all investors to comprehend. Additionally, you can utilise a variety of free online tools on our website for scenario planning and fee comparisons. Our Retirement Annuity Calculator helps you plan across different time horizons and contributions to see potential retirement outcomes. Our EAC Calculator is a useful tool for comparing costs across different service providers. Our experienced 10X Investment Consultants are also available at no additional cost to help you talk through your retirement annuity options

Final thoughts on opening a retirement annuity

Before starting your retirement annuity, make sure that you understand how contributions, tax rules, accessibility, the Two-Pot system, Regulation 28, fees, asset allocation, fund options, and the importance of annual reviews work. Consider reviewing the 10X RA, which provides access to a variety of Regulation 28 funds with low fees. If you have any questions about beginning a new RA, contact the knowledgeable and efficient 10X investment consultants for guidance. Get in touch today.