Retirement annuity strategy: What to do with your RA five years before retirement

The 5 years leading up to your retirement are some of the most crucial years when it comes to your retirement annuity planning, retirement income planning and decision making. There is also a mental shift that needs to happen as you move from an accumulation stage of your life to one where you use this accumulated capital to generate income. Any decisions regarding your retirement annuity and potential retirement income should be carefully considered, as they may impact your potential retirement outcomes. In this article, we will discuss factors to consider when managing your retirement annuity as you approach retirement and your retirement years.

Understanding what a retirement annuity is

A retirement annuity (RA) is a long-term retirement investment vehicle that allows you to save for your retirement years, offering appealing tax benefits. Contributions to your retirement annuity are tax-deductible to certain limits. These limits are up to 27.5% of your income and capped at R430,000 per annum.

Investment returns within your retirement annuity are also exempt from income tax, dividends tax and capital gains tax while invested. This essentially means that you may have more returns available to take advantage of potential compound growth and grow over the long term.

From the age of 55, which is the retirement age in South Africa, you may move your RA across to an annuity of your choice. Many South Africans will, however, keep their retirement annuity invested for a lot longer, and also continue to work until later in life. Your capital will then remain invested and potentially continue to grow, however long you decide to keep your savings invested.

Review your retirement readiness

As you approach your retirement years, it could be a good time to review how retirement-ready you are. Let’s have a look at the process and the factors to consider in order to evaluate your retirement readiness:

1. Review your savings: You may wish to review your total retirement savings. This would include your retirement annuity and any other savings that you may have in other investments, such as pension, provident and preservation funds.
2. Consider future expenses: You may also consider your anticipated expenses for your retirement years. It could be useful to draw up a budget to get an idea of potential expenses as well as your lifestyle expectations for the retirement years.
3. Research an annuity: You will need to choose between a life annuity and a living annuity. If you are planning on using a living annuity, you may need to consider your drawdown rate when planning for your retirement. The drawdown rate is the percentage of the total value of your living annuity that you draw as an income. You are able to draw a rate between 2.5% to 17.5%, although I rate of 4.5% or lower is widely considered sustainable.

Two other important considerations would be how long you anticipate needing your living annuity to provide you with an income, and to factor in a market downturn early in your retirement years. Both of these should be factored into your retirement planning to ensure that you’re ready for retirement.

Understanding the Two-Pot Retirement System

Five years before retirement is probably not the time to be dipping into your retirement savings; however, it is good to understand the changes in legislation that govern access to retirement savings in South Africa.

The implementation of the Two-Pot Retirement System in September has changed the way that contributions and withdrawals to and from retirement products are handled in South Africa. All contributions to retirement products are now split between two pots, namely: 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 prior to September 2024.

Withdrawals from the savings pot are permitted once per year, for a minimum amount of R2,000. Withdrawals are taxed at your marginal tax rate, and there will also be an administration fee charged. You should avoid accessing the savings pot, if possible and instead keep your savings invested to potentially grow and compound over time.

One-third of your contributions will be allocated to the savings pot, and two-thirds of your contributions will be allocated to the retirement pot. The retirement pot can only be accessed upon retirement. It will then need to 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.

Revisit your investment asset allocation

Your RA capital will be invested in a fund or funds within the retirement annuity “wrapper”. These funds will be made up of a mix of different asset classes such as equities, real estate, bonds and cash. You will select your asset allocation according to your risk tolerance levels - how tolerant you are to risk, your investment timelines and your long term financial plan and goals. As an investor, you have the freedom to choose from a selection of carefully designed funds, each with a different mix of assets and geared towards different investor profiles.

Equities may get the best returns in the long term, as well as be the most volatile of the asset classes. 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). Keep in mind, however, that past performance doesn’t guarantee future results. Real estate may also generate some good returns, while bonds will produce some lower returns but likely bring stability to your portfolio. Although bonds are seen as a more conservative option, this does not mean they will never outperform what’s expected. Cash is likely to return the lowest returns of all the asset classes, while also being the most liquid and stable of the asset classes.

Balance is key when it comes to choosing a fund. A portfolio that is very heavily invested in cash may not experience much growth. A portfolio that is very heavily invested in equities may result in a lot of volatility. It’s important to match your asset allocation with where you are in life by looking at your investor profile and long-term financial plan. Diversifying across the asset classes may allow you to spread your risk and balance both potential risk and reward. 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 retirement annuity will also need to be Regulation 28-compliant, as RAs are subject to Regulation 28 of The Pension Funds Act. This Regulation puts a cap on how much you may invest in both equities and offshore. You may invest a maximum of 75% in equities and 45% offshore. Including offshore exposure in your portfolio can help add some protection from local market instability and any depreciation of the rand.

At 10X, there is a wide range of different funds available for investors. These funds offer you access to a mix of different asset classes, allowing you to diversify your portfolio while also remaining Regulation 28 compliant. Please visit our funds page for the most up-to-date fund information.

Plan your retirement income strategy

As you approach retirement, you will need to make some decisions regarding your retirement annuity and your retirement income strategy.

If your RA is less than R360,000 (as per the updated figures effective the 1st of March 2026), you will be able to withdraw the full amount as cash without the need to purchase a living or a life annuity.

Current regulations state that you may withdraw up to one-third of the vested portion of your RA in cash. The remaining capital in your RA will need to be used for an annuity. You are able to select either a life or a living annuity, and this will provide you with an income for your retirement years.

A living annuity is a flexible product that keeps your money invested while you draw an income from the capital. You are able to select both your underlying funds and your drawdown rate, both of which can be amended to cater to your changing needs or situation.

A life annuity is a product which is purchased from an insurance company. You will select your income payout structure when you purchase the product. There is less flexibility than with a living annuity, but also fewer concerns when it comes to the longevity of your capital, as you are guaranteed an income for life. Any risk will lie with the service provider.

Tax planning before you retire

Withdrawals at retirement will be taxed according to the following retirement lump sum tax tables, with the first R550,000 being tax-free. This table has been taken from the SARS website.

This table allows you to see the tax you may be liable to pay when retiring from your retirement annuity.

Decide whether to take a lump sum

An important consideration is the decision surrounding whether or not to take a lump sum withdrawal at retirement. You may want to use your lump sum to pay off debt or to pay for a big expense. This can bring with it certain risks, such as less available capital at retirement to fund your life or a living annuity. It’s always an important step to distinguish between needs and wants before taking a lump sum withdrawal. As always, you would want to ensure that you keep focused on your long-term financial plan and goals before making any hasty decisions.

Your retirement annuity and fees

Now, as much as any time, fees are extremely important. This is your final chance to accumulate savings. Lower fees may mean that there are more available returns to reinvest and to potentially compound and grow over time. Higher fees may result in there being fewer fees available to reinvest and potentially take advantage of compound growth. Let’s have a look at the usual fees that you may see deducted from your RA:

• Administration fees: These are the fees that are charged for the administration of the fund. This will be for tasks such as compliance, reporting, tax and similar.
• Advisor fees: An advisor will provide you with advice and other services. They may charge both an initial and an ongoing fee for these.
• Management fees: These are the fees charged for the running of the fund.

You would also want to make sure to check your Effective Annual Cost (EAC). This is a standardised metric that was introduced by ASISA in 2015. It lets you see the total fees and costs that are involved in owning an investment over a one-year period of time. All factors being equal, you may expect to find that a higher EAC means that there are fewer returns to be reinvested and allowed to compound over time. A lower EAC, on the other hand, may mean that there are more returns available to be reinvested and allowed to compound over time. The EAC of your investment should be just one factor to consider when you are evaluating service providers.

Let’s have a look at an example to help illustrate the effect of fees on your RA. 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 R 3,442,000

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

We can see how just small differences in fees lead to major differences in retirement outcomes. This example is for illustrative purposes only, and actual results may vary. You can find out more about fees here.

Our fees are low-cost, simple and transparent at 10X, ensuring that there are no hidden or surprise costs. Please explore our products for the most up-to-date fee information.

Final thoughts on retirement annuity strategy

The last few years before your retirement are an important time for saving, strategising and optimising before your retirement begins. The decisions you make now regarding your retirement annuity and retirement income can impact your retirement outcomes, the tax you pay and the income you will have available for the retirement years.

If you need guidance as you transition from your RA to a retirement income product, then it’s time to get in touch with the experienced investment consultants at 10X. Reach out and secure your future!