Retirement Annuity Fees: Why Costs Matter Over 20 or 30 Years

Your retirement annuity fees may seem small when expressed as a percentage, but it’s important to remember that retirement annuities are long-term vehicles. This means fees can compound over time. You may find that your RA is invested for a number of decades, so the effect of fees should not be ignored, as they may ultimately affect your final retirement outcomes. In this article, we will look in more detail at common fee terms, how fees work, the effects fees may have over time, how to compare fee providers, and, finally, how 10X helps by keeping fees simple and transparent.

Why fees matter so much in a retirement annuity

A retirement annuity (RA) is a long-term savings product designed to help you save for your retirement years. It offers attractive tax benefits, allowing tax-deductible contributions of up to 27.5% of your salary, capped at an annual limit of R430,000. You can contribute regularly each month or make ad hoc lump-sum contributions into your RA as and when money is available.

An RA can be a great option for self-employed individuals or freelancers with unpredictable income who are saving for retirement. It can also be useful if you are looking for another way to save for retirement alongside a company pension or provident fund. An RA is a long-term investment, and the fees charged are not one-off. They may reduce the available returns for reinvestment and potential compounding over the long term. When choosing between service providers, it’s important to carefully consider the potential fees you may be charged on your RA.

The difference between gross returns and net returns

Gross returns are your investment returns before fees have been deducted. Net returns refer to the returns you, as the investor, keep after fees have been deducted. Fees may reduce the net returns available to reinvest after fees have been accounted for. This may then affect your retirement outcomes. If we look at an example where two investments earn the same returns, with one charging higher fees than the other, the lower-fee investment may mean you have more available returns to grow and compound over time, assuming all other factors remain equal. Let’s take a look at a simple example, R4,000 per month over 30 years, to illustrate the effect that fees of 1% compared with fees of 3% may have when these fees are compounded over 30 years. We will assume the following information for our example:

• Starting capital: R0
• Monthly contributions: R4,000 at the end of each month
• Investment period: 30 years
• Gross annual return: 10%
• Inflation: 5% annual inflation
• 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 R2.69 million. Scenario 2 - 3% fees: After 30 years, your RA will grow to an estimated inflation-adjusted value of R1.94 million.

We can see how just a small difference in fees can still lead to huge differences in retirement outcomes. This example is for illustrative purposes only and real results may vary. You may like to read this article to learn more about the effect of fees.

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What types of retirement annuity fees should you look for?

As an RA investor, there are a few typical fees that you may see charged. Let’s have a look at some of these fees:

• Advisor fees: If you decide to make use of an advisor, they may charge an initial and an ongoing fee for their advice and any additional services.
• Administration fees: There will be administration fees charged for admin tasks. Examples may include reporting, tax and compliance, amongst others.
• Management fees: These are fees charged for the operation and management of the fund.

It is important to review these fees annually to ensure that these are in line with expectations. H3: Understand TER, TIC and EAC

There are a few key terms related to costs that you may see on your investment statement. We will have a look at these in some detail:

• TER (Total Expense Ratio): These are the ongoing expenses within an investment fund.
• TIC (Total Investment Charge): The total investment charge, which combines the TER with transaction costs within the fund.
• EAC (Effective Annual Cost): An annualised estimate of all costs and applicable charges.

Effective Annual Cost was introduced by ASISA in 2015 as a way to understand the full cost of holding an investment over a one-year period of time. The EAC combines various charges linked to an investment product, and it is shown as a percentage value. Depending on the product, this may include, amongst others, investment management fees, administration costs, advice fees and penalties. Assuming all other factors are equal, a lower EAC may mean that more of your capital remains invested and available to potentially earn returns. A higher EAC may place greater pressure on net returns as fees will compound over time. Costs should be considered in isolation, as other factors like risk, investment strategy, service and product features also play an important role.

Understanding asset allocation

Low fees are an important consideration when choosing a service provider, but they are not the only factor. Other factors you may want to consider when evaluating different service providers include fund selection options, client service, investment approach, and asset allocation. This research by Brinson, Singer, and Beebower highlights the importance of asset allocation selection.

As a 10X investor, you may select from a range of diversified 10X investment funds. Each fund has a different combination of asset classes and is designed for a specific type of investor, risk profile and investment horizon. You may choose the fund that best aligns with your financial goals, time horizon, and risk tolerance.

Equities are usually included in a portfolio to provide long-term capital growth and the potential to earn returns above inflation. Equities offer you exposure to companies and economic growth. However, they may also experience significant market declines, with values fluctuating considerably over shorter periods. They might be more appropriate for investors with longer timelines and greater comfort with portfolio volatility.

Real estate may contribute to long-term portfolio growth whilst providing exposure to real assets and economic activity. Income is generated through rentals and distributions. However, listed property can be volatile and may be affected by factors such as interest rates, economic conditions, occupancy levels, and changes in the property market. Real estate may also provide a good hedge against inflation.

Bonds are generally less volatile than equities, but this does not mean that they are entirely risk-free. Bonds can provide some stability, income and diversification within a portfolio. Bond values may be influenced by changes in interest rates, inflation expectations, and the issuer's ability to repay its debt. They are considered conservative, but they still may outperform expectations.

Cash is usually the most liquid and stable asset class and is typically less volatile than real estate or equities. Returns may not keep pace with inflation over long periods, which may affect purchasing power.

You may also wish to include some offshore exposure in your portfolio, which may offer more opportunities across businesses, economies, and industries. You will also need to consider Regulation 28 of The Pension Funds Act. This places a cap of 45% on exposure to offshore assets and 75% on exposure to equities. This has been put in place to help you avoid a poorly diversified portfolio.

At 10X, our funds include a range of different asset classes. To find out more about our funds available, check out our funds page.

The Two-Pot Retirement System

The Two-Pot Retirement System was introduced in South Africa on the 1st September 2024. It splits retirement savings into components which each have different rules governing them. New contributions are generally split, with one-third being allocated to the savings pot and two-thirds being allocated to the retirement pot. Any savings that occurred prior to 1 September 2024 will be in the vested component. This vested component are subject to the rules that were in place before the 1st September 2024.

Retirement Component: The retirement component is to remain preserved until retirement with the goal of providing an income for retirement via an annuity.

Savings Component: The savings component allows for one withdrawal per tax year. This will need to be for a minimum amount of R2,000. You will be charged at your marginal tax rate and an administration fee.

Vested Component: The vested component holds pre-1 September 2024 savings and preserves the rights attached to those amounts.

Example 1: If R12,000 is contributed to a retirement fund after the implementation of the Two-Pot Retirement System, R4,000 is allocated to the savings component and R8,000 to the retirement component. A withdrawal from the savings component will reduce the amount available to potentially grow and compound for your retirement years.

Example 2 (Including vested component): We will assume that an investor had R500,000 saved in a retirement fund before 1 September 2024. With the introduction of the Two-Pot Retirement System, 10% of this amount, with a limit of R30,000, was transferred to the savings component as seed capital. The remaining R470,000 would have stayed in the vested component and continued to be governed by the old rules in place prior to the 1st of September 2024. If the investor then contributes R12,000 after implementation, around R4,000 will be allocated to the savings component and R8,000 will be allocated to the retirement outcome.

How 10X approaches RA fees

10X focuses on low-cost, transparent and simple fees, making it easy for investors to understand and see what they are being charged. Our investment approach looks at an index-based investment approach coupled with a more active approach when it comes to asset allocation.

Most of our retirement products have fees of 1% or less. This will depend on the product chosen and the amount invested. Please visit our retirement annuity information page to see further information on RA fees.

10X Tools

10X offers an EAC calculator which allows you to compare the costs of different service providers. The EAC calculator can be a handy tool when it comes to comparing your RA costs with those of another service provider when making decisions related to your RA. You may also like to try out the retirement annuity calculator when doing your scenario planning.

Along with the EAC calculator and RA calculator, 10X also offers a number of free online tools on our website that you may like to make use of. Feel free to browse through all of our calculators. Our investment consultants are also here to answer any queries you may have when it comes to retirement investments.

Questions to ask before choosing a RA provider

Before choosing a retirement annuity provider, it’s worth asking a few practical questions about the product, the investment approach, the fees and the level of support available to you. An RA is usually a long-term commitment, so the provider you choose should make it easy to understand what you are investing in, what you are paying and how your retirement savings are being managed. Let’s have a look at some questions to consider before you choose your provider:

• What are the fund options available to me?
• Is there a fund that aligns well with my investor profile, investment timeline and long-term financial goals?
• What is the provider's investment strategy, and does it make sense for long-term retirement investing?
• Are fees clear, transparent and easy to understand?
• What is the Effective Annual Cost (EAC) on the investment statement, and how does it compare to other providers?
• Are there any upfront fees, advice fees, administration fees, management fees or exit penalties that I should know about?
• Is it easy to manage the RA if I need to update contributions, review fund choices or make changes in future?
• Does the provider offer calculators, statements and support that help me understand my retirement annuity over time?
• Can I access knowledgeable consultants who can explain the product, fees, fund options and transfer process clearly?
• Does the provider give me enough information to make an informed decision without making the process unnecessarily complicated?

Final thoughts on RA fees

Fees charged on retirement annuities are even more important to consider because RAs are long-term products, and fees may compound over time. When compounded over the long term, what may seem like a small difference in fees can have a major impact on your retirement income available for the retirement years.

As an investor, it is important to review fees, compare costs across different service providers, understand fee terms, and reassess fees annually. To learn more about 10X fees, contact the experienced 10X investment consultants, who are ready to answer your questions.