retirement-planning

Retirement annuity investment strategies: Index tracking vs active management

3 October 2025

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The uncomfortable truth about retirement in South Africa - Rands and Sense by 10X [video]

Investing for your retirement is a long-term game, and retirement annuities are among the most popular vehicles for building up savings. There is often a debate about the best investment strategy to use for retirement annuities, index tracking or active management, and each comes with its own advantages.

The investment strategy being used can play a crucial role in determining the costs, performance, and long-term growth of your retirement annuity (RA). In this article, we will explore these two different strategies in greater detail and unpack some of the finer points to help you decide which is the best fit for you.

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What are retirement annuities?

Retirement annuities are popular long-term investment savings vehicles, offering notable tax advantages. Contributions to retirement annuities are tax-deductible, subject to annual limits. These are up to 27.5% of your income or R350 000. Additionally, investment returns within the retirement annuity are exempt from income tax, dividends tax and capital gains tax while invested.

This then allows for more potential compound growth on your returns, eventually providing for your retirement years. Retirement annuities are particularly useful if you are self-employed or don’t have a company pension or provident fund.

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You can contribute lump sum amounts to your retirement annuity, or you can choose to contribute regularly via a monthly debit order. Both lump sum and regular contributions are subject to the minimum limits implemented by your service provider. You can access your retirement annuity from retirement age, which is age 55 in South Africa. Upon retirement, your savings may be used for an annuity, which will then provide you with an income during retirement.

You will also have to comply with Regulation 28 of the Pension Funds Act. All retirement products, including retirement annuities, are subject to these regulations, which were instituted to help investors avoid a poorly diversified portfolio. Current regulations put a limit on the percentage of your retirement annuity that you may invest in both equities and offshore. This cap is currently at a limit of 45% for offshore and a limit of 75% allocation to equities.

The Two-Pot Retirement System and retirement annuities

The Two-Pot Retirement System, implemented in September 2024, changed the way that contributions to retirement products are handled in South Africa. All contributions to retirement products are now split between a ‘retirement pot’ and a ‘savings pot’. There is also a third pot called the ‘vested pot’. This vested pot includes all savings accumulated before September 2024, and is governed by the old rules, which were in place prior to the implementation of the Two-Pot Retirement System in September 2024.

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Two-pot cheat sheet

The rules state that 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; you will also have to pay an administration fee. The savings pot should generally only be accessed in an emergency. If possible, withdrawals should be avoided.

Your savings are split between the retirement pot and the savings pot, with one-third of contributions being allocated to the savings pot and two-thirds of contributions allocated to the retirement pot. 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.

Understanding index tracking and active management

There are advantages to both index tracking and active management, and the right choice will depend on your personal preferences and circumstances.

Index tracking

Index-tracking (sometimes referred to as passive investing) is when a benchmark index, such as the S&P 500, is mimicked with the goal of generating the same returns. There are fewer related activities with index tracking (less research, analysis and trading), which often leads to reduced fees overall. Consistency is key when it comes to index tracking, as the strategy is focused on long-term growth, stability and consistent returns for you, the investor.

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Data from the SPIVA Scorecards suggests that index tracking may outperform active management most 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-year period ending 31 December 2024.

Active management

Active management is a strategy where a fund manager looks to choose the winning stocks and time the market to obtain the best returns available. With this strategy, there is a lot more research and analysis involved, as well as trading costs. As such, active management strategies often come with higher overall fees for investors. Often, active funds are more volatile in performance than index funds, as they seek to outperform average returns, while index funds aim for long-term stability.

Retirement annuity fees: The silent killer of long-term returns

When it comes to your retirement annuity, your fees and costs need to be carefully managed. Fees play a major role in shaping the potential growth of your investment. When fees are low, they support long-term growth potential, but high fees can steadily reduce returns and impact the overall value of your savings. As time passes, high fees compound, which can potentially diminish returns and reduce capital. On the other hand, low fees mean more of your returns can be reinvested, which means compound growth can work in your favour.

Let’s look at an example to help illustrate the effect of fees on your retirement annuity. We’ll 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

This example is for illustrative purposes and actual results may vary. You can learn more about the importance of fees here.

The Effective Annual Cost (EAC) of your retirement annuity is a standardised metric introduced by ASISA in 2015. All factors being equal, you may find that a higher EAC means that there are fewer returns to be reinvested and allowed to compound over time. A lower EAC may result in there being more returns available to be reinvested and allowed to compound over the long term. The EAC of your investment would be just one factor to consider when evaluating service providers.

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The usual fees that you would expect to see deducted from your retirement annuity are as follows:

Administration fees: These are the fees charged for administration-related tasks such as compliance and reporting.

Advisor fees: An advisor charges fees for investment guidance and advice. You may see both an initial and an ongoing fee charged.

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

Other fees: There may be applicable fees, such as early exit penalties, charged on some products.

As mentioned above, fees for index tracking investment strategies tend to be cheaper than active management strategies. 10X offers an EAC calculator, which allows you to compare and analyse your EAC deductions. This calculator is a part of our online suite of free tools, all available on our website.

The importance of asset allocation for your retirement annuity

Asset allocation plays the biggest role in the performance of your retirement investments, accounting for over 90% of returns, as seminal research from Brinson, Singer and Beebower shows. This is the mix of different asset classes, such as equities, bonds, real estate and cash, which your retirement annuity savings are invested in.

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As an investor, you would consider both your risk profile and your investment timelines when deciding on an appropriate asset allocation. Your risk profile refers to your risk tolerance levels and how comfortable you are with market volatility, while your investment timelines refer to how long you foresee being invested in your retirement annuity. At 10X, you have the freedom to customise your underlying portfolio by choosing from a selection of carefully curated investment funds, each with a different mix of assets and geared towards different investor profiles.

Equities are the more volatile of the asset classes, but they may also generate better returns. As data suggests, 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), although past performance does not guarantee future results. Including equities in your portfolio may, therefore, be a good way to potentially beat inflation with your returns, especially when these returns are compounded over time.

If you’re seeking stability in your portfolio, you may wish to include more bonds and cash. Bonds add stability to a portfolio but usually generate lower returns than equities. Cash is likely to generate the lowest returns of the asset classes, but it is also the most liquid and stable class.

Diversifying across the asset classes allows you to spread your risk while also taking advantage of any good gains that may occur in certain asset classes. Including some offshore exposure in your portfolio will allow for further diversification and any potential gains from the international market. It may also add some protection against any political and local market instability, which may then result in depreciation of the Rand.

Of course, you will need to ensure that you always adhere to Regulation 28. At 10X, we offer a range of carefully selected funds, which are well-diversified across the various asset classes, including offshore. These funds are suited to investors with different levels of risk tolerance and investment timelines. To find out more about our available funds, please visit our funds page.

How index tracking aligns with diversification and long-term retirement goals

Retirement annuities are long-term investment vehicles designed to potentially compound returns over a long-term horizon. When coupled with index tracking, this can result in consistent and reliable returns for the investor. Index tracking looks to take advantage of compound growth over these long periods by minimising costs and, therefore, allowing more potential returns to be reinvested.

Index tracking also provides access to a wide range of assets, industries and companies. This diversification across asset classes has the effect of reducing your overall risk. Additionally, index tracking removes the emotional component and the temptation to chase returns, instead letting the markets work for you.

When active management may be justified

Active management can, however, still be a viable investment strategy. Let’s look at the kinds of investors who may find an active management strategy a good fit for them:

  • Investors who are looking to invest in niche markets may prefer a more active management strategy, as this allows for more tailored research and analysis to help with specific investment decision-making.
  • High net wealth clients may also prefer an active management strategy for more personalised portfolios.
  • Investors who favour certain sectors or industries where they see growth potential may prefer an active management strategy, as these areas can then be focused on for investment.
  • Some investors might also be more risk-tolerant and enjoy timing the market in the hopes of outperforming average returns, despite the risks.

The 10X retirement annuity investment strategy

At 10X, we use an index-tracking investment strategy to keep costs low, combined with a more active approach to asset allocation decisions, in a strategy that is geared towards long-term returns that produce the investment and retirement outcomes our clients deserve.

This more effective middle path combines the efficiency of index tracking with respect for valuation principles. Our approach strikes a balance between rigid passive investing and hyperactive trading. We do not attempt to predict short-term market movements and respect the long-term relationship between price and value.

At 10X, we charge fees of 1% or less for most retirement products. You can find a practical example of our approach in one of our flagship offerings, the 10X Your Future Fund. Learn more about our investment strategy here.

Final thoughts on retirement annuity investment strategies

Index tracking and active management each come with different advantages and drawbacks. For more risk-tolerant investors who are seeking to invest in niche markets or are chasing the potential rewards of timing the market, active management makes sense. For those seeking lower costs and consistent returns over the long term, index tracking might be a more appropriate strategy.

To learn more about retirement annuity investment strategies or to start building towards your retirement today, get in touch and secure your future!

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