The high-fee living annuity trap: How fees can quietly destroy your retirement income

As a retiree, you may feel that you have a good general understanding of living annuity fees, but it is extremely important to ensure that you fully understand everything you’re being charged for. Fees may have a direct impact on the growth of your living annuity, which may then have a knock-on effect on both the income that you are able to draw from your living annuity and its longevity.

In this article, we will take a further look into the effect of fees, the importance of your Effective Annual Cost (EAC) and the value of a transparent, simple and low-fee strategy, such as that offered by 10X. If you are paying lower fees, this may mean more potential compound growth, which will have a positive impact on your income and the long-term sustainability of your living annuity.

A living annuity recap

A living annuity is a flexible long-term investment vehicle. It may last for a time span of 20 years, up to even 40 years. This annuity has the benefit of allowing you to have your savings invested as well as draw an income from these savings.

Each year, you are able to set your drawdown rate. This is the percentage of the total value of your investment that you draw as income each year. This can be a percentage between 2.5% and 17.5%. It’s important that you select a sustainable drawdown rate in order to ensure that your living annuity has the best chance of being able to provide you with an income throughout your retirement years. A sustainable drawdown rate is generally thought to be around 4%. Your capital is invested in a selection of underlying funds within the living annuity “wrapper”. These funds can be changed to cater for changing needs and financial circumstances over time.

One major part of a living annuity’s appeal is the ability to pass on the remaining capital to your beneficiaries outside of your estate, tax-free.

Why fees matter more in a living annuity than anywhere else

You’re no longer contributing

As you are no longer contributing any capital to your annuity, the effect of fees is even more pronounced. Higher fees may reduce the returns available to be reinvested and allowed to potentially grow over time. Lower fees may mean that there are more returns available to reinvest and potentially grow and compound over the long-term.

Fees amplify drawdown impact

Not only are you not contributing to your living annuity, but you are also drawing from your capital in the form of your drawdown rate. The more you take out of your living annuity in the form of income and fees, the less capital you have available to potentially grow over time, which in turn may affect the longevity and sustainability of your living annuity.

The 10X advantage

At 10X, we understand the importance of low fees on your living annuity. We therefore look to minimise fees and ensure that we are simple and transparent when it comes to the fees that we do charge.

Understanding Effective Annual Cost

The Effective Annual Cost (EAC) is a standardised metric which was introduced by ASISA in 2015. This metric allows an investor to see and evaluate the total costs and fees that are associated with owning an investment product over a one-year period of time. This metric includes the total expenses that are associated with having an investment.

This would include: administration fees, advisor fees, management fees and any other fees applicable to that particular investment product. It is shown as a percentage, for example, 1%.

Let’s have a look at these fees in a bit more detail:

Administration fees: There will be fees deducted for administration-related tasks. These will be for tasks such as reporting, compliance and tax administration.

Advisor fees: Your advisor will charge fees for the advice and services that they provide to you. There may be both an initial and an ongoing advisor fee charged.

Management fees: These will be the fees that are charged for the running and management of the fund.

Other fees: There may be other applicable fees charged.

All factors being equal, a higher EAC would mean that less of your investment returns can be reinvested and potentially grow and compound over time, while a lower EAC may mean that more of your returns may be reinvested and potentially grow over the long term. Keep in mind that the EAC of an investment is just one factor to consider when comparing service providers.

At 10X, we offer an EAC calculator, which is a part of our free online suite of tools available to investors. This EAC calculator allows you to both compare and evaluate your EAC with your current provider to that which is charged by 10X.

At 10X, we make sure that our fees are simple and transparent for all investors to understand. You can expect no hidden costs and no surprises. H2: How high fees quietly destroy your retirement income Let’s look at an example which will help illustrate the effect that fees can have on your annuity: We will assume the following for this example:

• Investment amount: R2 million
• Investment period of 25 years
• Drawdown rate: 4% (assuming an annual payment)
• Return of 12% per annum
• An inflation rate of 6%

Example 1 (0.86% Fees): Real investment value is approximately R2.36 million.

Example 2 (3% Fees): Real investment value is approximately R1.45 million.

What may seem like a small difference in fees can have a significant impact on the potential growth of your living annuity over the long term. Note that this example is for illustrative purposes only, and actual results may vary. Learn more about the impact of fees here. Over time, the difference shown in the above example is more than just a number on a statement. This can translate into very real lifestyle consequences in your retirement years. Higher fees may mean you have to reduce your monthly income later in retirement, delaying major expenses, or feeling more anxious during market downturns.

Lower fees, on the other hand, may provide a more robust buffer against poor market years and inflation, helping your income last longer. As an annuity needs to support you for potentially decades, small annual fee differences can shape your financial security, flexibility and peace of mind throughout retirement.

Why 10X’s investment strategy amplifies the benefits of low fees

Low fees are powerful on their own, but the impact becomes even greater when paired with a smart and efficient investment approach. 10X Investments combines cost-conscious investing with a long-term strategy designed to maximise potential growth while managing risk. This means investors who invest with us don’t just benefit from low fees, but also an evidence-based approach built to make your savings work for you.

Index-tracking is more cost-effective

Index-tracking is where a benchmark index is tracked in order to try to mimic the same returns as that particular benchmark index. There are usually fewer tasks involved with such a strategy, which may mean there are fewer costs incurred. This ultimately may mean lower fees for you, as the investor.

An actively-managed strategy is when a fund manager actively seeks out the best stocks. Understandably, this kind of approach will involve a lot more activities. You could expect to see more research, analysis and trading costs involved. This may mean there are higher fees passed on to you as the investor.

10X makes use of an index-tracking investment strategy, with a more active approach to asset allocation. This allows us to be more cost-effective with the fees that we charge. Fees charged by 10X are usually less than 1% for most retirement products. This will depend on the product chosen and the amount invested. Please explore our products for the most up-to-date information.

Appropriate asset allocation

You will want to select an appropriate asset allocation that aligns well with your investor profile and long-term financial objectives and goals. Your asset allocation is usually a mix of equities, real estate, property, bonds and cash. Each of these assets will have slightly different features. At 10X, you can choose from a selection of carefully curated funds, each with a different mix of assets and geared towards different investor profiles.

Equities are the most volatile of the asset classes, but they are also likely to generate the best returns over time. Bonds are most stable, but you can expect them to generate lower returns over time. This is not to say bonds will never perform, merely that they are seen as a more conservative option. Cash is the most stable of the asset classes, but you can expect the lowest returns of all the asset classes. By diversifying across these different asset classes, you can take advantage of the different asset classes and also balance both risk and reward.

Aligning your investor profile with your asset allocation means that you will consider both your risk tolerance levels and your investment timelines when structuring your asset allocation. This can be adjusted as time goes on, in order to cater to your changing needs and financial goals. You will also look to match your asset allocation with your long-term financial plan. Asset allocation plays the biggest role in the performance of your living annuity, accounting for over 90% of returns, as seminal research from Brinson, Singer and Beebower shows.

Global diversification reduces portfolio volatility

Living annuities are not subject to Regulation 28 of The Pension Funds Act, which means that you are able to invest your living annuity up to 100% offshore. However, this does depend on whether your service provider is able to offer this, depending on their own internal limits. Including offshore exposure will help add some protection against local market volatility and any depreciation of the Rand.

10X offers a range of well-diversified funds which include offshore exposure. These funds are carefully selected and include a variety of different asset classes, ensuring that there is a fund to suit a variety of different investors. We also offer the opportunity to invest your living annuity 100% offshore, if this is your preference. This may suit investors who are already heavily invested in the local South African market and looking to further diversify offshore.

How to analyse your own living annuity fees

Let’s have a look at the steps involved to analyse your fees:

Step 1 — View your EAC statement

You should be able to find your EAC on your investment statement. If not, you can request your statement from your service provider. When reviewing your EAC, make sure you’re looking at the latest available statement, as fees may change over time. For comparison purposes, focus on the 1-year EAC, as this offers the clearest view of what you’re currently paying.

Step 2 — Break down the 4 EAC components

Evaluate the 4 components of your EAC. These are the administration fees, advisor fees, management fees and any other fees that may be applicable. Understanding where each portion of your EAC comes from helps you see which costs are necessary and which may be negotiable or avoidable.

Step 3 — Compare your EAC to 10X

Make use of the 10X EAC calculator and compare the EAC charged by your current service provider with that which is charged by 10X. When comparing, make sure you are comparing like for like. This means similar investment amounts, similar types of funds, and whether advisor fees are included or not. Remember, even a 1% difference in fees per year can have a major impact on retirement outcomes.

Step 4 — Decide whether switching providers makes sense

Once you have compared and evaluated your EAC, you may decide that it makes sense to switch providers depending on your findings. Lower fees may mean that your living annuity will be more sustainable in the long run and therefore be able to provide for you for your retirement years. The goal is not just to move to the cheapest option, but to make sure you are getting good value, appropriate investment exposure and transparent pricing.

Our 10X investment consultants are skilled and experienced. Don’t hesitate to give them a call if you have any questions surrounding your living annuity, fees or changing service providers.

Final thoughts on living annuities and high fees

High fees can be an important factor in the growth of your living annuity over time. For this reason, you need to make sure that you carefully monitor your fees and especially your EAC. This metric is comprehensive and able to give you the full picture when it comes to the fees that you are being charged. What may seem like a mere small difference in fees, when compounded over many years, may have a significant impact on the growth of your living annuity over time.

By choosing a service provider, such as 10X, whose living annuity focuses on low, transparent fees, index-tracking and diversification, you can rest assured that your living annuity is in the best hands and has the opportunity to provide for you throughout your retirement years. Selecting a low-fee provider may be the most important financial decision that you can make.