The hidden tax that's devouring your Retirement Annuity

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

We sit down with 10X Investment Consultant lead Andre Tuck and discuss the retirement savings crisis in South Africa. We also delve into living annuities, retirement annuities, TFSAs and everything in between. Read more

The Retirement Annuity tax you never voted for

You diligently pay your income tax, VAT, and capital gains tax, because you understand these are the price of living in a functioning society. But there's another tax you're paying, and it's one that's perfectly legal, almost completely hidden, and potentially more devastating to your retirement than any government levy. It's the fee tax buried deep in your retirement annuity, and it's quietly devouring your financial future one fraction of a percentage point at a time.

Unlike the taxes SARS collects, this hidden tax doesn't fund schools, hospitals, or infrastructure. Instead, it silently transfers your wealth from your retirement savings to fund managers, advisors, and insurance companies. The most insidious part? The higher this tax, the less you notice it, because it's deducted before you ever see your returns.

If you're a mid-career professional with a substantial retirement annuity, that 2.8% (or even higher!) annual fee might seem like a reasonable cost of professional management. Your statements show steady growth, your advisor provides reassuring updates, and the deduction happens automatically. But what if that seemingly modest percentage is actually eating away at your retirement wealth, potentially costing you over R800,000 in today's purchasing power by retirement?

An introduction to investments in South Africa [video] - Rands and Sense by 10X

Want to know about offshore investing, property as an asset class, tax-free savings accounts and everything in between? Rands and Sense by 10X is here to help you understand investment fundamentals. Read more

The maths behind the numbers is brutal, but clear. While you're focused on market performance and contribution increases, this hidden tax compounds relentlessly against you, eroding what should be a comfortable retirement into a financial struggle.

Your Retirement Annuity is your wealth-building foundation

Before diving into the fee impact, it's worth understanding why your retirement annuity is such a powerful wealth-building tool. A retirement annuity offers a unique triple tax advantage that makes it one of the most efficient investment vehicles available to South African investors.

First, your contributions are tax-deductible up to 27.5% of your income or R350,000 annually, whichever is lower. This means SARS effectively co-funds your retirement savings—if you're in a 41% tax bracket, every R1,000 you contribute only costs you R590 after the tax deduction.

Retirement Annuity vs Tax-free Savings Account vs Bond: Where Should Your Extra Money Go?

Got extra money to invest? Compare three powerful options: Retirement Annuity, Tax-Free Savings Account (TFSA), or paying off your bond faster. Learn the pros and cons of each to make an informed choice for your financial future. Read more

Second, all growth within your RA is completely tax-free. Unlike discretionary investments where you pay tax on interest, dividends, and capital gains, your RA allows the full power of compounding to work without any tax drag during the accumulation phase.

Third, when you retire, you can take up to one-third as a tax-free lump sum (or first R550,000 across all retirement funds), while the remaining two-thirds provides ongoing income during your working years. These tax advantages are substantial, but they can be completely undermined by high fees that compound against you over decades.

How the hidden tax creates an R855,000 retirement deficit

To understand how this hidden tax destroys wealth, let's examine the case of Sarah, a 45-year-old marketing executive who currently has R800,000 in her retirement annuity and contributes R8,000 monthly. She's unknowingly paying this 2.8% hidden tax annually, which seems small until you calculate how it devours her retirement wealth over time.

The Hidden Tax Scenario (2.8% annual erosion):

• Current balance: R800,000
• Monthly contribution: R8,000 (increasing with inflation)
• Gross investment return: 10% per annum
• Net return after hidden tax: 7.2% per annum
• Investment term: 20 years until retirement

The Low-Tax Alternative (1% annual cost):

• Current balance: R800,000
• Monthly contribution: R8,000 (increasing with inflation)
• Gross investment return: 10% per annum
• Net return after fees: 9% per annum
• Investment term: 20 years until retirement

The annual difference seems modest—just 1.8 percentage points. However, over 20 years, this hidden tax creates devastating wealth erosion in today's money (we say 'in today's money' because we are using a gross return already adjusted for inflation. If we hadn't adjusted for inflation, the gross return and fee tax difference would be higher):

• High hidden tax final value: R3.1 million (in today's money)
• Low-cost alternative final value: R3.9 million (in today's money)
• Total lost to hidden tax: R855,000 (again, in today's money)

That 2.8% hidden tax doesn't just cost Sarah money, it devours over R855,000 from her retirement. Put another way, this hidden tax reduces her final retirement pot by 22%, potentially forcing her to work years longer or accept a significantly reduced standard of living.

Fund Performance vs. Net Investment Returns

Many investors make the mistake of focusing solely on their fund's performance rankings, but what matters for your retirement outcome is your net investment return after all fees are deducted. Your fund might be a top performer, but if it charges high fees, your actual returns could be disappointing.

For example, if Fund A delivers 11% gross returns but charges 3% in fees, your net return is 8%. If Fund B delivers 10% gross returns but charges only 1% in fees, your net return is 9%—despite Fund A's superior performance, Fund B delivers better outcomes for you.

This is why understanding your Effective Annual Cost (EAC) is crucial. The EAC represents the total annual cost of owning your investment, including management fees, administration costs, advisor fees, and any other charges. It provides a single, comparable figure across providers.

Don't understand your Retirement Annuity? It's ok! Here's the help you need.

10X Senior Investment Consultant Michael Rossouw has seen plenty of clients misunderstand the reasons to save into their retirement annuity. Here are some great reasons to prioritise your RA. Read more

The hidden costs in your retirement annuity

Many retirement annuity products, particularly those sold through traditional financial advisors, carry multiple layers of fees that aren't always obvious or transparent:

• Management Fees: Typically 1-2% annually for actively managed funds
• Administration Fees: Often 0.5-1% for policy administration
• Advisor Fees: Usually 0.5-1% annually, plus potential upfront commissions
• Performance Fees: Additional charges if the fund outperforms certain benchmarks
• Switching Fees: Penalties for changing your investment allocation
• Early Exit Fees: Charges if you transfer to another provider

These costs can easily accumulate to 3% or more annually. Even worse, some older retirement annuity products include hidden charges or complex fee structures that make it difficult to calculate your true cost of investment.

At 10X Investments, we focus on simplicity and cost-effectiveness with a single management fee that decreases as your investment grows. There are no upfront fees, advice fees, performance fees, or exit penalties. Our transparent fee structure ensures more of your money stays invested and continues benefiting from compound growth.

Higher fees very likely means lower returns (and here's the maths to prove it)

Paying high fees on your retirement investments (such as a retirement annuity or a living annuity) almost always means less money in your pocket, and less money for your retirement. Read more

When does switching you RA provider make sense?

The decision to switch providers isn't just about fees. You need to consider the complete picture, including switching costs, investment disruption, and the time horizon for benefits to materialise.

Switching potentially makes sense when:

• Your current EAC is above 2% and you have more than 10 years until retirement
• You're paying multiple layers of fees that aren't providing clear value
• Your current provider's investment performance consistently lags benchmarks after fees
• You want more control over your investment choices and lower ongoing costs

On the other hand, you might consider sticking around if:

• You're within 5 years of retirement and switching costs are significant
• Your current EAC is already competitive (below 1.5%)
• You're satisfied with your current investment performance and service levels

Importantly, the break-even period for switching is typically 2-3 years, after which the fee savings begin compounding in your favour. For someone like Sarah with 20 years until retirement, the benefits of switching to a low-cost provider are clear.

Paying less, and confidently transitioning to direct investment

Taking control of your retirement annuity doesn't mean going it alone. With the right tools and resources, you can make informed decisions while saving significantly on advisory fees that compound against you over time.

Start by clearly defining your retirement goals and assessing your risk tolerance. Our online calculators can help you determine whether you're on track for your target retirement income and how different fee levels impact your final outcome.

Essential tools for managing your RA:

• : Determine how much you need to save monthly to reach your retirement goals
• : Calculate the true annual cost of your current investment
• : Compare the long-term impact of different providers' fees
• : Estimate your annual tax benefits from RA contributions

Many investors successfully manage their retirement investments using these resources, combined with getting the facts from an experienced investment consultant. This approach can save tens or even hundreds of thousands of rands in fees over your investment lifetime.

At 10X, our investment consultants aren't financial advisors, but they can discuss our products and explain the benefits and trade-offs of different approaches. They're available to answer questions about fees, investment options, and the switching process, all at no cost to you.

Asset Allocation: Keeping fees low while maximising growth

High fees become even more damaging when combined with poor asset allocation decisions. Many traditional RA products default to conservative 'balanced' funds that may not provide sufficient growth for long-term investors, while charging premium fees for active management that often fails to add value.

With a low-cost provider, you can access diversified portfolios that include:

• Local equities for rand-denominated growth
• Offshore equities for global diversification and currency protection
• Property investments for inflation protection and yield
• Bonds and cash for stability and capital preservation

The key is matching your asset allocation to your time horizon and risk tolerance, while keeping the underlying costs as low as possible. For most investors with 10+ years until retirement, a growth-focused allocation with significant equity exposure offers the best chance of building substantial wealth, especially when combined with low fees.

Index Tracking vs. Active Management: The evidence is clear

One of the most important decisions affecting your long-term costs is choosing between actively managed funds and index-tracking options. The evidence consistently shows that the majority of active managers fail to outperform their benchmarks after fees, making low-cost index tracking an attractive option for many investors.

According to SPIVA research, more than 60% of actively managed funds in South Africa underperformed the S&P South Africa DSW Capped Index over ten years, and this underperformance becomes even more pronounced over longer periods when fees are considered. By investing in low-cost index funds, you can capture market returns while minimising fees, often resulting in better net performance than expensive active alternatives.

This doesn't mean all active management is necessarily a bad idea, but it does mean you should carefully evaluate whether the premium fees charged by active managers are justified by their track record of outperformance after costs.

Taking action for your Retirement (Annuity)

If you're currently paying high fees in your retirement annuity, the cost of inaction grows larger every day. Here's how to take control:

1. Calculate your current EAC using our
2. to see the long-term impact of different fee levels
3. Review your current investment allocation to ensure it matches your time horizon and goals
4. to understand your options and the switching process

Remember, you're not just choosing an investment provider. You're choosing your retirement lifestyle. The difference between high fees and low fees could determine whether you retire with dignity and comfort, or find yourself struggling financially in your golden years. Every percentage point you save in annual fees is a percentage point that compounds in your favour, building the retirement you've always envisioned.