Retirement annuity for late starters: Catch-up strategies in your 40s and 50s

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A retirement annuity is a tax-efficient investment product designed to help you save toward retirement. We often see South Africans who have not saved enough for retirement due to a focus on other financial priorities, such as buying a house, paying off debt or funding children’s education. If you’re one of these people, you may find yourself turning 40 or 50 years old without a solid retirement plan in place, and this can be overwhelming. It is, however, important to remember that it is never too late to start saving towards a more secure future.   

A retirement annuity (RA) can be an excellent way to start a solid savings plan and potentially accelerate these savings due to the tax deductions on offer, especially when this is coupled with consistent contributions and compound growth. In this article, we will focus on strategies to implement when making use of a retirement annuity to help accelerate your savings plan if you find yourself starting later in life. 

Retirement annuity for late starters Understanding the challenge 

If you do find yourself starting your retirement savings later in life, there are 3 main challenges that you’ll have to deal with. These challenges are: 

• Limited time for compound growth: The shorter your time horizon, the less time your money has to compound for you.  
• Higher contribution requirements: You may need to contribute a larger portion of your income in order to make up for lost time. 
• Increased emotional and financial pressure: You may experience more pressure, urgency and anxiety compared to an early starter when it comes to saving, which can make long-term planning more difficult.  

While these obstacles are real, they are not insurmountable. These challenges shouldn’t invoke panic; they should instead motivate you to take a more strategic and focused approach to your retirement planning. 

Why a retirement annuity is a powerful catch-up tool  

A retirement annuity is a powerful tool to make use of when trying to catch up on savings, mainly due to its tax-efficient nature. Contributions to retirement annuities are tax-deductible, subject to annual limits. These limits are up to 27.5% of your income or R350 000. You can also contribute more than that, by making use of Section 10C of the income tax act. You can find more detail on that here. 

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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. When it comes to your RA, you can contribute lump sum amounts or make a regular contribution, depending on what suits your existing financial situation.  

Regular contributions, such as a monthly debit order, allow for more of your funds to accumulate over time, which allows you to take advantage of potential compound growth. The key to retirement planning is to be consistent and disciplined, especially when you are playing catch-up. Your savings remain invested in your retirement annuity until retirement age, which is currently age 55 in South Africa. Your retirement annuity can then be used to purchase either a life or a living annuity, which will serve as your source of income for retirement. We’ll now cover a few ways for you to maximise growth as a late starter.

Retirement annuity catch-up strategies 

In this section, we’ll take a closer look at some of the most effective strategies for catching up as a late starter. 

Increase contributions aggressively and early 

If you’ve started your retirement savings later on in life, the first priority should be to accelerate contributions, as time is no longer on your side in the same way it is with someone in their early 20s. The most effective way to close the gap is by saving more as early and as consistently as possible.  

Aim to maximise (or even exceed) the annual tax-deductible limits as stipulated by SARS. As mentioned, these are 27.5% of your taxable income, capped at R350 000 per annum. For those with the financial flexibility, it makes sense to contribute as much of your disposable income as you can. Even small increases in monthly contributions can make a significant difference in retirement outcomes over time, especially when combined with the tax deductions available on retirement annuity contributions.  

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Consider adding any spare money you may have to your RA; this can be from bonuses, windfalls or any additional income. This boosts retirement savings while enhancing tax efficiency. Setting up a regular debit order can also help to keep you disciplined and consistent with your contributions, avoiding any behavioural inertia that may set in. In summary, aggressive and early action is one of the keys to catching up.  

Optimise for growth with the right asset allocation  

As a late starter, how your asset allocation is structured is crucial. Asset allocation plays the biggest role in the performance of your retirement annuity, accounting for over 90% of returns, as seminal research from Brinson, Singer, and Beebower shows. Your asset allocation is the mix of underlying assets that your portfolio is invested in. This is usually a mix of equities, bonds, real estate and cash.   

At 10X, you have the freedom to customise your underlying portfolio by choosing from a selection of carefully curated funds, each with a different mix of assets and geared towards different investor profiles. As an investor looking to catch up on savings, you would ideally look to choose a fund that includes some growth assets, such as equities, in your asset allocation mix.  

Equities are the most volatile of the asset classes, but they are also likely to generate the best returns of the asset classes over the long term. Equities have historically produced returns above inflation, by around 7% annually over the long term (based on JSE All Share Index performance versus CPI from 1960-2020); however, past performance does not guarantee future results.

Bonds, on the other hand, will add some stability to your portfolio, but they may yield lower returns. Real estate, or property, is less stable than bonds but can also generate good returns, while cash is the most stable of the asset classes, but will likely generate the lowest returns of all. As an investor, you’ll need to consider both your risk tolerance levels, time horizons and financial goals when selecting your asset allocation.  

You will also need to take note of Regulation 28. All retirement products, including RAs, are subject to Regulation 28 of the Pension Funds Act. This regulation was implemented in order to help investors structure a well-diversified portfolio that isn’t too heavily invested in any of the asset classes. Current regulations put a limit on the percentage of your retirement annuity that you may invest in both equities and offshore. This limit is currently sitting at 45% for offshore and also a 75% allocation to equities.  

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Diversifying offshore allows you to take advantage of the different economic cycles, as well as any other opportunities that are on offer in the larger international market. It may also provide a hedge against any local market volatility and the subsequent depreciation of the Rand.  

At 10X, we offer a range of well-diversified funds for you, the investor, to choose from, according to your investor profile. These funds are all well-suited to investors with different risk profiles and time horizons, helping you to find the best fund to suit your situation. Please visit our fund page for the most up-to-date information.  

Keep fees ultra-low 

Fees can have a significant impact on your retirement annuity’s performance. This is especially important for late starters looking to maximise savings. Low fees would potentially allow for more returns to be reinvested and potentially grow over the long term. Higher fees may mean that there are fewer returns to be reinvested and potentially compound over time.  

The usual fees that you may see charged on your RA are as follows: 

Advisor fees: An advisor will charge fees for the investment guidance that they provide. You may see both an initial and an ongoing fee charged.  

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

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

Other: There may be other applicable fees charged, such as early exit fees. 

Let’s look at an example to help illustrate the effect of fees in a situation where you’re playing catch-up with your retirement savings.  

We will assume the following factors: 

• Investment period of 20 years 
• Initial lump sum investment of R300 000 
• Monthly contributions of R10 000 
• Return of 12% per annum 
• An inflation rate of 6% 

Example 1 (0.86 % Fees): Real investment value is approximately R3,442,000 

Example 2 (3% Fees): Real investment value is approximately R2,775,000 

As this example shows, a small difference in fees can have a huge impact on the real investment value. This difference is even more evident when compounded over time. Note that this example is for illustrative purposes only, and actual results may vary. You can learn more about fees here.  

The Effective Annual Cost (EAC) of your investment refers to the total costs involved in owning an investment over a one-year period of time. 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. Of course, the EAC would be just one factor to consider when comparing service providers. Consider using our EAC calculator to compare service providers, part of our free online suite of tools. 

10X has a transparent, cost-effective and simple fee structure that is easy to understand. We are able to keep our fees low due to our index investment strategy, combined with a more active approach to asset allocation. Fees on our retirement products are usually 1% or less, depending on the product chosen and the amount invested. Feel free to review our products for the most up-to-date fee information. 

The role of the Two Pot Retirement System 

The implementation of the Two Pot Retirement System, first introduced in September 2024, has changed the way that contributions and withdrawals to retirement products are handled in South Africa. If you are starting a retirement annuity, it’s important that you understand how this system works. All contributions to retirement products are now split between two pots, namely a ‘retirement pot’ and a ‘savings pot’. There is also a third pot called the ‘vested pot’.  

The vested pot includes all savings accumulated prior to September 2024, and is governed by the old rules, which were in place before the changes implemented in September 2024.  

The savings pot allows for limited access to your savings before retirement, specifically for emergencies, such as medical needs or urgent repairs. You can, therefore, make one withdrawal per tax year for a minimum amount of R2,000. Keep in mind that withdrawals are taxed at your marginal rate and subject to an administration fee.  

The majority of your savings will go to the retirement pot, reserved exclusively for use at retirement. The retirement pot can only be accessed upon retirement, where it will 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.  

Final thoughts on retirement annuities for late starters 

Even if you find yourself without a proper retirement plan in place in your 40s or 50s, it’s not too late. You can start your retirement annuity later in life, but you need to ensure that you focus on higher contributions, low fees and strategic asset allocation.  

Retirement annuities are an excellent way to fast-track your retirement savings, particularly because of the great tax savings that they offer. The 10X retirement annuity is a transparent, low-cost option, perfect for those looking to create a more secure future. Get in touch with our investment consultants today to learn more!