Retirement Annuity Planning: How to Build a Stronger Retirement Foundation

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A retirement annuity is a long-term savings product designed specifically to help you save for your retirement. A retirement annuity can be a great way to start building a consistent and disciplined approach to your retirement savings by strategically selecting funds, keeping fees cost-effective and leveraging tax advantages, all with a long-term view to your savings.

As an investor, you recognise the importance of saving for retirement, but maintaining a consistent, disciplined savings strategy can be challenging. This article explores 10X’s approach, including fund selection, tax benefits, fees, restricted access, Regulation 28, and how these elements contribute to building a solid retirement foundation.

What is a retirement annuity?

A retirement annuity (RA) is a long-term retirement savings product that helps you save for your retirement years. Your contributions may qualify for tax deductions, subject to applicable limits. All investment growth within your RA is exempt from capital gains tax, income tax and dividends tax.

Your RA is designed to help you build your retirement capital over the long term, so it is important to be aware of the restricted access built into the RA structure. At retirement, this vehicle may be converted to an annuity: either a life or living annuity, which will then provide you with an income for your retirement years.

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Who should consider a retirement annuity?

A retirement annuity can be a useful retirement savings vehicle for a variety of investor types, depending on your needs. You can contribute via a regular debit order, or you can contribute a lump-sum amount when you have the capital available. You will need to keep note of any minimum investment amounts that your service provider may have.

An RA is suitable for self-employed individuals without employer-sponsored pensions or provident funds. It benefits freelancers with variable income, allowing lump sum contributions when extra capital becomes available. Additionally, an RA may also suit those looking to save more and benefit from the appealing tax advantages offered.

An RA may work best when you take a consistent and disciplined approach to managing it. A good way to do this is to set up a monthly debit order; this can help automate the process and ensure consistent contributions. It’s also generally a good idea to increase contributions as your salary increases, or as you have more disposable income available.

Understanding your retirement annuity

A key benefit of using an RA is the potential tax advantages. Contributions are tax-deductible up to specified limits: currently, R430,000 or 27.5% of your annual salary. Your refund depends on your tax deductions and personal tax situation. Additionally, your retirement annuity has limited access.

The access restriction is not just a legal rule but also a behavioural mechanism. Since retirement is usually many years away when opening an RA, the absence of a clear boundary can lead to short-term needs often taking precedence over long-term savings. A retirement annuity acts as a barrier, preventing immediate access from undermining the preservation of future retirement funds. Some access is allowed via the two-pot system, and more on this further down.

This helps keep the money invested, allowing it to grow and potentially compound over the long term. Having a more accessible investment product for emergencies could be helpful, while your retirement annuity remains a long-term savings tool for retirement. The RA isn’t designed to cover all your financial needs alone, so consider it one part of a broader retirement plan.

This balance is important when thinking about how an RA fits into your overall financial planning. While accessible savings can help you manage short-term needs, your retirement annuity is intended to serve a very specific purpose: building capital for your retirement years. Keeping these goals separate helps investors avoid placing unnecessary pressure on their long-term retirement savings while still having flexibility elsewhere in your financial plan.

The importance of asset allocation

Asset allocation can help with building a strong foundation for your RA. As the research from Brinson, Singer and Beebower mentions, your asset allocation choices can play an important role in the growth of your retirement annuity over time.

You should consider your risk tolerance levels, investment timelines and long-term retirement goals when choosing your appropriate asset allocation. Your asset allocation should ideally be well-diversified across the various asset classes. These asset classes will include equities, real estate, bonds and cash. At 10X, you can choose from a selection of carefully curated funds, each suited to different investor profiles and invested in a different mix of assets.

Equities are usually included in a portfolio to potentially provide long-term capital growth and to earn returns that are able to outpace inflation. Equities give you exposure to companies and economic growth, but they may also experience volatility, which may include significant market drops. Value may change over shorter periods, which means they may be more suitable for investors with longer time horizons. Equities have historically delivered returns above inflation by approximately 7% annually over long periods (based on JSE All Share Index performance versus CPI from 1960-2020).

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Bonds can provide income, diversification as well as some stability. They are generally less volatile than equities, but they may still bring some risk. Bonds can be affected by factors such as changes in interest rates, inflation expectations and the ability of the issuer to repay its debt. Bonds may be seen as more conservative, but they may still outperform expectations.

Real estate provides exposure to real assets and economic activity. It may contribute to long-term growth in your portfolio. However, listed property can be volatile and may be affected by interest rates, economic conditions, occupancy levels and changes in the property market. Real estate may also serve as a good hedge against inflation.

Cash is usually the most liquid and stable of the various asset classes. It is less likely to experience the same levels of volatility as equities and real estate. Cash returns may struggle to keep pace with inflation over long periods, which can impact the purchasing power of your money.

The funds at 10X include a range of different asset classes, allowing you to select a fund that best meets your requirements. Please review our funds page to find out more about what we have on offer.

Regulation 28 and choosing an appropriate fund

When you are selecting your asset allocation, you will also need to consider Regulation 28. This places restrictions on the percentage of your portfolio that you may invest in equities and also offshore. Current regulations state that you may invest up to 75% in equities and up to 45% offshore.

Regulation 28 has been put in place to help investors avoid poorly diversified portfolios that may be too heavily concentrated in certain asset classes. At 10X, investors can choose from a range of Regulation 28-compliant funds with different asset mixes, rather than selecting individual shares or bonds themselves. These funds will be invested inside the RA wrapper.

At an individual account level, investments are capped by the following asset class limits:

• Equities (Shares): Maximum of 75% total
• Offshore Assets: Maximum of 45% total
• Property: Maximum of 25% total
• Private Equity: Maximum of 15% total
• Hedge Funds: Maximum of 10% total
• Commodities: Maximum of 10% total
• Crypto Assets: Explicitly prohibited

Additionally, there is an overall limit of 45% for infrastructure investments, and a cap of 25% across all asset classes for exposure to any single entity or company (with exceptions only for government investments).

Why fees matter over decades

Retirement annuities are long-term investments, which means that fees may be compounded over a number of decades and potentially impact your retirement outcomes. Let’s have a look at some of the terms that you will see on your investment statement:

• TER: This is the Total Expense Ratio, and it refers to the ongoing expenses within an investment fund. (A way to compare the operating costs of similar funds, but it is not the final cost)
• TIC: This looks at the Total Investment Charge. It combines the TER with transaction costs within the fund. (A way to compare the full cost of the investment portfolio itself)
• EAC: An annualised estimate of the impact of product, investment management advice, administration fees, and all other applicable charges.

The EAC is a useful metric that can be used as a comparison tool. It was introduced by ASISA in 2015. The EAC combines various charges linked to an investment into a single annual percentage. Depending on the product, this may include investment management fees, administration costs, advice fees, penalties, guarantees and the effect of loyalty bonuses. As such, investors can more easily compare the cost structures of different products and providers on a more consistent basis. Assuming all other factors are kept equal, a lower EAC generally means that a larger portion of your money remains invested and can potentially grow over time. A higher EAC may mean there are fewer available returns to reinvest in order to potentially grow your capital. Common fees you may expect to see include:

• Administration fees: There may be administration fees, such as those related to activities like reporting and compliance.
• Advisor fees: There may be advisor fees charged if an investment advisor is used.
• Management fees: These would be the fees charged for the running and management of the fund.

Let’s have a look at a fee example to help explain the effect of fees on your RA. We will assume the following information for this example:

• Starting capital: R0
• Monthly contributions: R3,000 at the end of each month
• Investment period: 30 years
• Gross annual return: 10% p.a.
• Inflation: 5%
• No withdrawals are made during the investment period, and contributions remain fixed.

Scenario 1 - 1% fees: After 30 years, your retirement annuity will grow to an estimated inflation-adjusted value of R2.02 million.

Scenario 2 - 3% fees: After 30 years, your retirement annuity will grow to an estimated inflation-adjusted value of R1.46 million.

We can see how small differences in fees can easily lead to major differences in final retirement outcomes. Note that this example is for illustrative purposes only, and real results may vary. This helpful maths article looks to further explain the effect of fees on your returns.

At 10X, our fees are kept simple, transparent and cost-effective. Fees charged on your RA are usually less than 1%, but this will depend on the amount invested. Please view our fee information on RAs to find out more.

How the Two-Pot Retirement System affects retirement annuities

The Two-Pot Retirement System, which was introduced in September 2024, now allows for withdrawals from your savings component, subject to the rules in place. New contributions will be allocated with one-third going to the savings portion and two-thirds being allocated to the retirement portion. Any savings prior to the Two-Pot Retirement System implementation will go to the vested portion. The rules in place before the new system was implemented will apply to the vested portion. There is a minimum withdrawal amount of R2,000, and withdrawals will be taxed at your marginal tax rate. You will also be charged an administration fee.

Your RA should not be viewed as a simple savings account. Its main value lies in disciplined long-term saving, tax benefits and continued investment. It’s important to also remember that withdrawing from your RA may impact the capital that you have available for retirement.

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

Example 1: If R6,000 is contributed to a retirement fund after the implementation of the Two-Pot Retirement System, approximately R2,000 will be allocated to the savings pot and R4,000 to the retirement pot. A withdrawal from the savings component may have the effect of reducing the amount available to potentially compound for the retirement years.

Example 2 (Including vested component): Let’s assume an investor had R300,000 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 R270,000 would have stayed in the vested component and continued to be governed by the old rules. If the investor then contributes R6,000 after implementation, around R2,000 will be allocated to the savings component and R4,000 to the retirement component. The investor would therefore have money in all three pots.

Please check the latest FSCA guidance for the most up-to-date information on the Two-Pot Retirement System.

How 10X supports retirement annuity investors

At 10X, our goal is for retirement annuity investors to clearly understand how their savings are allocated and which decisions can best enhance their retirement results. We aim to make investing easy to grasp, boost client confidence, and ensure they understand their investment options, all while providing outstanding service. Additionally, our fees are transparent, simple, and affordable.

You will also find supportive and knowledgeable investment consultants on hand to assist with any queries you may have. Additionally, everybody has access to a range of free online tools on our 10X website, further helping you along your investment journey. Our EAC calculator and retirement annuity calculator are just two of these useful tools.

Final thoughts on retirement annuity planning

A retirement annuity can play a vital role in your overall retirement plan and help you to build a stronger retirement foundation by making use of some of the key factors at your disposal. You would look to carefully manage your fund selection, take advantage of the tax benefits on offer, ensure cost-effective fees, maintain a consistent and disciplined approach to your contributions and maintain a long-term view.

If you are looking for some guidance on any of these areas, don’t hesitate to contact our experienced 10X investment consultants who are here to help you at no additional cost!