Retirement Annuity exit strategies: What happens after you retire?

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A retirement annuity is a tax-efficient investment product designed to help you save towards retirement. The primary purpose of a retirement annuity is to ensure that upon retirement, you have built up enough savings to provide you with an income and maintain a similar lifestyle when you are no longer earning an active salary. At retirement age, which is currently 55 in South Africa, you will face some choices as a retiree.

First and foremost, you will need to decide how much cash, if any, you would like to withdraw, subject to the applicable rules and regulations in place. You’ll then need to select which kind of income product to invest your savings in: a life annuity or a living annuity. Each of these options comes with its own benefits and drawbacks.

In this article, we will help guide investors through the retirement options available and help you to decide on the best option for your personal circumstances. We’ll also unpack how fees and asset allocation impact retirement annuities.

What is a retirement annuity?

Retirement annuities are retirement savings vehicles that allow you to save for your retirement years. They’re especially ideal for individuals who don’t have a company pension or provident fund, as well as those looking to supplement existing retirement savings.

Retirement annuities are tax-efficient savings vehicles. Contributions to retirement annuities are tax-deductible, subject to annual limits, which are up to 27.5% of your income or R350 000. Investment returns within the retirement annuity are exempt from income tax, dividends tax and capital gains tax while invested, therefore allowing for more returns to be reinvested and potentially compounded over time.

You can contribute lump sum amounts or make a regular contribution to your RA, depending on what suits your financial situation. Regular contributions, such as a monthly debit order, allow for more of your savings to accumulate over time and to take advantage of potential compound growth. Even small contributions, made regularly, can lead to big retirement outcomes via the power of compound growth.

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Let’s look at an example of how compound growth works:

In Scenario 1, you start with a R100K lump sum and generate a 6% real return over a period of 30 years.

In Scenario 2, you start with a R100K lump sum, and you include a R1,000 debit order per month to it for 30 years, generating a 6% real return over the same period.

In Scenario 1, you end up with around R482,000.

In Scenario 2, you end up with around R1.5 million.

We can clearly see how even modest amounts compounded over time add up significantly. Note that this example is for illustrative purposes only, and real results may vary.

Understanding the Two-Pot Retirement System

The implementation of the Two Pot Retirement System changed the way that contributions and withdrawals to and from retirement products are handled in South Africa. This system was introduced in September 2024.

All contributions to retirement products are now split between a ‘retirement pot’ and a ‘savings pot’. There is also a third portion, which is termed the ‘vested pot’. The vested pot includes all savings accumulated before September 2024, and is governed by the old rules, which were in place before the changes in September 2024.

Withdrawals from the savings pot may be done once per year, for a minimum amount of R2000. Withdrawals are taxed at your marginal tax rate, and there is also an administration fee. In general, the savings pot should only be accessed in an emergency, if at all. The bulk of your savings goes to the retirement pot, with one-third of contributions being allocated to the savings pot and two-thirds of contributions being allocated to the retirement pot.

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The retirement pot can only be accessed upon retirement, where it will then be used to purchase either a life or a living annuity. Please consult the latest FSCA guidance for the most up-to-date information on the Two-Pot Retirement System.

What happens to your retirement annuity at retirement age?

At retirement, from age 55, you will be able to access your Retirement Annuity (RA), but many investors choose to wait until later, giving their investments more time to grow, especially when they have alternative income sources.

If the total value of your retirement annuity is less than R247,500, you can withdraw the full amount as cash without the need to purchase a living annuity. The provision is designed to make sure smaller savings pots can be taken as a lump sum rather than be locked in an annuity structure that would provide very limited monthly income.

If the value of your retirement annuity is greater than R247,500, current regulations state that you may withdraw up to one-third of it in cash, with the first R550,000 being tax-free. The remaining two-thirds of your RA will need to be used for an annuity. You, therefore, have to choose between a life annuity or a living annuity, which will serve as your source of income for your retirement years. The choice between annuity types will depend on factors like your risk appetite, life expectancy, the desire for flexibility and whether you have other sources of income.

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Any cash lump sum withdrawals at retirement will be taxed according to the following retirement lump sum tax tables. This has been taken from the SARS website.

Living annuity option

A living annuity is a flexible post-retirement investment vehicle which allows you to invest your savings while also drawing an income. You can choose a drawdown rate of 2.5% to 17.5%, the rate being the percentage of the total value of your living annuity. This drawdown rate can be amended each year at the policy anniversary date, providing you, as the investor, with flexibility. You also have the freedom to choose your income frequency, with choices to be paid annually, biannually, quarterly or monthly. As an investor, you’ll also have to choose the underlying funds in which the capital is invested.

One of the main risks that comes with this is longevity risk, which is the risk of outliving your living annuity. For this reason, you need to choose a sustainable drawdown rate that allows your living annuity to last throughout retirement. Financial experts generally consider a drawdown rate of 4% to be sustainable, but nothing can be guaranteed. This allows for more capital to remain invested, taking advantage of the potential compound growth over time.

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The Golden Equation is often used as a guiding principle when it comes to living annuities. This states that fees, inflation and your drawdown rate should be less than or equal to your return on your investment. This formula (fees + inflation + drawdowns must be less than or equal to your return on investment) can be followed to help you avoid depleting your capital.

Living annuities can be passed directly on to your nominated beneficiaries, so you always want to ensure that your beneficiaries are up-to-date. A living annuity is best suited to investors who enjoy flexibility when it comes to their investments, as well as those who are more risk-tolerant with longer time horizons to play with.

Life (guaranteed) annuity option

A life annuity, also known as a guaranteed annuity, is an insurance product purchased from an insurance company. A guaranteed annuity will provide you with a fixed income for the rest of your life. In other words, you are ‘guaranteed’ this income.

This also means that you have less flexibility as the investor, as you are unable to adjust the drawdown rate to cater for any changing income requirements, and you have no say in the underlying funds in which your capital is invested.

There is, however, no longevity risk, as this risk lies with the insurance company. This generally removes any of the stress that comes with market volatility, as you’ll be getting your fixed income no matter what. You are not able to pass your guaranteed annuity on to beneficiaries, as when you pass, the annuity will go to the insurance company.

A life annuity may be more suited to more risk-averse investors who prefer regular and predictable income payments. While there is less flexibility, you will not have to rely as much on careful planning, budgeting and self-discipline.

Combining living annuities and life annuities

Often, retirees forget about the option for a blended annuity. A mix of living annuities and life annuities can create a balanced retirement strategy. You can’t, however, split an existing living annuity.

With a blended annuity, you are given the flexibility and control over your investments and withdrawals from your living annuity, alongside a reliable income stream from a life annuity. This can optimise income stability and growth potential, as living annuities can help cater to your changing financial needs while life annuities provide a steady base income to protect you against longevity risk.

Asset allocation and offshore exposure in your retirement annuity

The asset allocation of your retirement annuity plays a major role. At 10X, you can adjust your underlying investment portfolio by selecting from a comprehensive range of expertly curated investment funds, each geared towards different investor profiles. These funds allow you to diversify across asset classes such as equities, property, bonds, and even offshore investments.

If you have a higher risk tolerance, you might consider a fund with a higher allocation towards equities, while more conservative investors may prefer a fund with a greater allocation to bonds. Diversification across the different asset classes means you can potentially benefit from different economic cycles. Equities, for example, 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), though past performance does not guarantee future results.

Adding some offshore exposure to your retirement annuity can be beneficial. The South African market makes up less than 1% of the total global market capitalisation. For this reason, you might expect more opportunities in the international market, due to access to a bigger variety of industries and companies. Investing offshore also adds some protection against local market volatility and any potential depreciation of the rand.

Regulation 28 governs the rules surrounding offshore exposure in retirement annuities. All retirement products, including retirement annuities, are subject to Regulation 28 of the Pension Funds Act. The act was implemented to help investors avoid a poorly diversified portfolio. Current regulations put a cap on the percentage of your retirement annuity that you may invest in both equities and offshore; a limit of 45% for offshore investments and a limit of 75% allocation to equities.

10X offers a wide range of funds within our retirement annuity wrapper, each aimed at meeting the needs of different investor profiles. To view our fund choices, please visit our funds page.

Retirement annuity fees

As you’re building towards retirement, don’t underestimate the role that fees can play in your final retirement outcomes. Even small differences in fees can lead to major differences at retirement.

High fees can reduce the returns that you have available to reinvest, whereas lower fees may mean that you have more available returns to reinvest. These returns can then potentially grow and compound over time. The typical fees that you may see charged are as follows:

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

Advisor fees: An advisor will charge fees for financial guidance and services. You may see both an initial and an ongoing fee charged.

Administration fees: These are fees charged for any administration tasks related to the fund. For example, tax, compliance and reporting tasks.

Let’s look at an example of 1% in fees versus 3% in fees. For the sake of the example, let’s assume the following factors:

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%

Example 1 (1% Fees): Real investment value is approximately R1.8 million

Example 2 (3% Fees): Real investment value is approximately R1.3 million

Just a 2% difference in fees is equal to a difference of R500K+ upon retirement. Please note that this example is for illustrative purposes only, and actual results may vary.

The Effective Annual Cost (EAC) of your investment refers to the total costs involved in owning an investment over one year. This is a standard metric which was introduced by ASISA in 2015. All factors being equal, a higher EAC may mean that there are fewer returns to be reinvested and allowed to potentially grow over time. A lower EAC may mean that there are more returns to be reinvested and allowed to compound over the long term. The EAC is just one factor to consider when comparing service providers. Our EAC calculator can be used to compare service providers, offered by 10X as a part of an online suite of free tools.

10X has a cost-effective and simple fee structure that is easy to understand, with fees of 1% or less for most retirement products. You can expect complete transparency and no hidden costs.

Final thoughts on retirement annuities upon retirement

Deciding what to do with your retirement annuity upon retirement is one of the most important financial decisions that you will make. There are a number of factors to consider, such as your appetite for risk, your financial situation, your timelines, your family set-up and your financial goals and plans.

Living annuities provide flexibility and the ability to remain invested, but they require careful management to avoid depleting your capital too quickly. Life annuities provide certainty and security, but they are far less flexible and adaptable over time.

At 10X, we simplify your retirement with low fees, a straightforward approach and superior returns. For any queries on what to do with your retirement annuity upon retirement, get in touch with our investment consultants today, and secure a retirement that works for you.