The importance of low fees with retirement annuities

Retirement annuities are a tax-efficient retirement savings investment vehicle which allows an investor to accumulate funds that will pay an income in retirement. Upon retirement, the investor can move the funds across to a living annuity or a life annuity, which then provides the investor with an income through their retirement years. The investment returns that your retirement annuity generates over time are important, but just as important are the fees that you pay on your retirement annuity. Even a slight difference in fees can make a huge difference when compounded over time.  

10X believes in a straightforward investment approach and low fees. In this article, we will look into the importance of fees in more detail, including why fees are often overlooked and how to make sure that you are aware of all fees you are being charged on your retirement annuity. 

What are retirement annuities?  

Retirement annuities are retirement savings vehicles that allow you to save funds for your retirement years. They are a useful alternative for investors who don’t have a company pension or provident fund; for example, self-employed individuals. Retirement annuities are tax-efficient savings vehicles, and contributions to retirement annuities are tax-deductible, subject to annual limits. These are up to 27.5% of your income or R350,000. Investment returns within the RA are exempt from income tax, dividends tax and capital gains tax while invested.  

Retirement annuities are subject to Regulation 28 of the Pensions Fund Act. This act was implemented to protect investors against poorly diversified portfolios. This regulation puts a limit on the amount 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 75% maximum allocation to equities.  

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You can contribute lump sum amounts or make a regular contribution to your RA, depending on what suits your situation. Regular contributions allow for more of your funds to accumulate over time and to take advantage of potential compounded growth. You can also amend your regular contributions as your requirements or life situation changes. 

The two-pot retirement system and withdrawals 

The Two-Pot Retirement System was introduced in September 2024. This has changed the way that withdrawals from retirement products operate in South Africa. All contributions to retirement products are now split between a ‘retirement’ and a ‘savings’ pot. There is also a third pot called the ‘vested pot’. The vested pot includes all savings accumulated prior to September 2024. The vested pot is governed by the old rules, which were in place before September 2024. 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, and you will also be charged an administration fee.  

The savings pot should ideally only be accessed in an emergency, such as to settle medical bills. The bulk of your savings will go to the retirement pot. One-third is allocated to the savings pot, and two-thirds are allocated to the retirement pot. The retirement pot can only be accessed upon retirement, where it must then be used to purchase an annuity. As soon as you turn 55, you are eligible for retirement in South Africa.  

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

How fees work in retirement annuities  

Fees are often overlooked by investors. Many times, this may be because the investor sees figures such as ‘3%’, which may not sound like a lot, but in reality, fees of ‘just 3%’ when compounded over time, can have a significant impact on the potential value of your retirement annuity. There are some common fees which you may see charged on your retirement. Let’s have a look at the kind of fees which you may expect to see charged: 

Administration fees: The fees charged for activities related to the administration of the fund, such as tax and reporting. 

Advisor fees: The fees charged by an advisor for their services. You may be charged an initial and an ongoing fee. 

Management fees: The fees charged for the management of the fund. 

The Effective Annual Cost (EAC) is a standard metric which was introduced by ASISA in 2015. This is a way for an investor to see the total costs involved with owning an investment over a one-year period of time. This would include management fees, advisor fees, administration fees, early exit penalties, guarantees and loyalty bonuses, where applicable.  

All factors being equal, a higher EAC may mean that less of your investment returns can be reinvested in order to potentially grow and compound over time. On the other hand, a lower EAC may mean that more of your investment returns may be reinvested and potentially grow and compound over the long term. Costs and fees can potentially impact the long-term growth of your retirement annuity, so you may wish to consider choosing a provider who charges transparent and low fees.  

The EAC allows you, as an investor, to assess the overall costs which you are being charged and compare these with the costs being charged by other providers. Naturally, the EAC would just be one consideration when comparing various service providers.  

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Why high fees can be detrimental to your retirement 

Fees play a crucial role in the long-term performance of your retirement annuity. Low fees support long-term growth, whereas high fees have the potential to gradually decrease your returns and erode your capital, which will then affect the long-term value of your retirement annuity.  

Essentially, aiming to minimise your fees can have a positive impact on the growth of your retirement annuity and ultimately the potential funds that you will have available to you for your retirement years. Let us review exactly how high fees can impact your real investment value.  

Quantifying the long-term impact: A fee comparison  

Let’s look at an example to show the effect of high fees on our living annuity. We will be comparing fees of 3% with fees of 1%. 

Let’s assume the following factors: 

• Investment period of 30 years 
• Investment amount of R1,000,000 
• Return of 12% per annum 
• An inflation rate of 6% 

Example 1 (1% Fees): Real investment value is R3,985,000 

Example 2 (3% Fees): Real investment value is R2,310,000 

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As you can see, a ‘small’ difference in fees of just 2% can have a detrimental effect on your real investment value. This can especially be seen when compounded over the long term, such as we have shown in this example by using an investment period of 30 years. The difference between 3% and 1% in fees leads to a difference of R1,675,000 in real investment value. 

At 10X, we charge low fees of 1% or less for most products. The exact number will depend on the product chosen and how much you are investing. We only charge a single management fee for our retirement products, and this fee decreases as the value of your retirement product increases. There are also no exit fees, and you won't be penalised for changing your investment strategy, as we do not charge penalties for this. To find out more about our fee structure, please visit our website or speak to one of our experienced and knowledgeable investment consultants, who will be more than happy to assist. 

How to identify and compare RA fees  

To see what fees and costs you are being charged by your service provider, you may wish to request the EAC breakdown from your provider. Some providers will have the EAC breakdown visible on your retirement annuity statement. 10X offers a free EAC calculator, which is a part of our online suite of tools.  

This allows you to see the costs associated with your 10X investment product. You can then use this information to compare with the costs of other service providers. It’s important to look out for any hidden costs associated with your RA, as well as any ambiguous advisor commission statements, which you may need help interpreting. You should be aware of all the fees that you are being charged in order to make an educated decision.  

Choosing a low-cost retirement annuity provider  

10X offers a retirement annuity with low fees. You’ll find that the typical investment management approach, that relies more on stock picking, usually incurs more charges, as there is more research, analysis and buying and selling involved. 10X makes use of an index tracking investment strategy, which also includes an active approach to asset allocation, allowing us to charge lower fees. You can find out more about our investment strategy here.  

All the funds available within the 10X retirement annuity make use of index tracking so that we can keep costs lower for our clients. To find out more about the 10X retirement annuity, follow this link.  

Transferring to a lower cost retirement annuity  

After assessing and comparing the costs associated with your current retirement annuity service provider, you may decide that you want to change service providers and use a service provider with lower fees. This is called a Section 14 transfer. To initiate a Section 14 transfer, there are a few steps to take. Let’s look at these steps in turn:  

1. Obtain a Section 14 out-quote from your current provider. This will detail any exit penalties associated with the transfer. 
2. If you wish to proceed with the transfer, you will need to sign the Section 14 out-quote to accept. 
3. You will then complete a retirement annuity application form with your new service provider. 
4. You will submit both the signed Section 14 out quote and the signed RA application form to your current service provider. You will also need to submit the signed RA application form to your new service provider. 
5. There will then be further documentation drawn up by the current (transferor fund) service provider which will be sent to the new service provider (transferee fund) to be signed by the principal members. 
6. Note: Section 14 transfers may take up to 6 months to complete. 

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Conclusion: The fee-focused retirement strategy  

Fees can have a profound effect on your retirement annuity and the potential growth of that retirement annuity over time. And, therefore, your income in retirement. The higher the fees are, the less of your returns are available to reinvest and potentially grow over the long term. High fees can impact the growth of your retirement annuity, whereas lower fees allow for more returns to be reinvested and potentially grow over time, which in turn impacts the value of your retirement annuity.   

When selecting your retirement annuity provider, you should always ensure that you are proactive and remain ‘on top of things’. This means ensuring that you have a copy of the EAC for your retirement annuity and that you’re aware of all the costs and fees associated with the investment. You can compare the various service providers' costs and fees to make an educated decision.   Start your journey to a secure future with 10X Investments. We offer low fees, a superior track record and a straightforward investment approach. Get in touch today to learn more!