Why starting a retirement annuity early pays off over time

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Saving for retirement is something everyone needs to do, but many fail to realise how starting a retirement annuity early can be much more beneficial in the long run. People often end up delaying their retirement savings, waiting for the ‘right time’ or until they receive a salary increase, but this means less time for savings to grow.   

A retirement annuity (RA) is a long-term savings vehicle that offers numerous benefits to the investor. By starting your retirement annuity savings earlier rather than later, you unlock opportunities associated with long-term savings and compound growth. In this article, we will explore the benefits of early saving, the impact of potential compound growth, tax efficiency, and the importance of low fees. 

What is a retirement annuity (RA)? 

Retirement annuities are tax-efficient retirement savings vehicles that allow you to save for your retirement years. The tax efficiency of these savings vehicles is one of the major benefits and reasons why investors often opt for retirement annuities. Contributions to retirement annuities are tax-deductible, subject to annual limits. These are up to 27.5% of your income, or a maximum of R350,000.  

Investment returns within the RA are also exempt from income tax, dividend tax and capital gains tax while invested. This allows for more of your returns to be invested and potentially grow and compound over time. RAs may especially appeal to self-employed individuals who are unlikely to have a company pension or provident fund to save money for their retirement years.  

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You can make regular contributions in the form of a debit order (most service providers will have a minimum debit order amount of around R500 or R1000 per month) or, if you prefer, you may make a lump sum contribution (there will usually be a minimum requirement here too) into your RA. You are able to adjust your contributions to suit your changing financial needs and situation, allowing for flexibility and control.  

The power of compound growth  

Compound growth is powerful, because growth builds on growth. You don’t just earn returns on your original investment; you also earn returns on the growth that’s already been added over time. Each year, any growth that your RA makes is reinvested, which then allows for further growth on the capital, a bit like a snowball effect. 

As you can imagine, the earlier that you start saving money in your RA, the more you can take advantage of the power of potential compound growth. Time is an important factor in the growth of your RA, and can be a great tool to maximise the potential growth of your savings.  

Even small, regular contributions made early on can turn into a significant amount by the time you retire. This is because compound growth rewards consistency and patience. Delaying your contributions, even by a few years, can mean missing out on a substantial portion of long-term growth. 

In the early years, growth might seem slow, but as your savings grow, so does the rate at which they grow. This means that the final years before retirement often produce the biggest gains, but only if you’ve given your money enough time to build up. That’s why starting early can have a far greater impact than trying to make up for lost time later with larger contributions. 

Let’s have a quick look at the power of compound growth in action. 

In the first scenario, you start with a R100k lump sum and generate 6% real return (i.e. after fees and inflation) over 30 years. In the second scenario, you start with a R100k lump sum, and add just R1000 per month to it for 30 years at the same 6% real return. 

In Scenario 1, you end up with roughly R482,000  

In Scenario 2, you end up with roughly R1.5 million. 

Conclusion: Small additions, compounded, add up! 

Mitigating market volatility through time and with asset allocation 

A major reason for starting your RA early is that it gives you time to recover from any market volatility in the short term. Investing over the long term has the effect of potentially lowering the risk of negative returns. Remember, retirement annuities are long-term savings vehicles, so giving your annuity the time it needs to grow is absolutely essential.  

 Asset allocation also plays a role in the growth of your retirement annuity over time and can be used strategically to mitigate against the effects of market volatility. The asset allocation of your RA refers to the mix of equities, bonds, real estate (property) and cash that your savings are invested in. As an investor with 10X, you have the freedom to customise your underlying portfolio by choosing from a selection of carefully curated funds, each with a different asset allocation and geared towards different investor profiles.  

You would select your fund according to your financial requirements, risk tolerance levels and your time horizons. Keep in mind that each of the different asset classes has different features. Equities are the most volatile of the asset classes, but you can expect better returns, while bonds add stability to the portfolio, as does cash. For example, 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); however, past performance does not guarantee future results.  

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Diversifying across the asset classes allows you to take advantage of gains in certain asset classes while mitigating against losses in other asset classes. You may also wish to diversify offshore to take advantage of opportunities that the international market has on offer. It’s important to remember, though, that retirement annuities are subject to Regulation 28 of the Pensions Fund Act. This act was implemented to protect investors against poorly diversified portfolios. Regulation 28 puts a cap on the amount of your retirement annuity that you may invest in both equities and offshore. This limit is currently at a limit of 45% for offshore and also a 75% maximum allocation to equities. 

10X Retirement Annuity funds 

10X offers a wide range of strategically picked funds within the retirement annuity wrapper. Each of these funds has been structured in order to suit different investors and different investor profiles, so there will be a fund to suit your financial situation and goals. 10X understands the importance of asset allocation and meeting your long-term investment goals.  

Let’s take a look at some of the retirement annuity fund options at 10X:   

10X Your Future Fund: The 10X Your Future Fund is one of 10X’s flagship offerings. The fund is expertly designed to deliver cost-effective exposure to a comprehensive range of local and international asset classes. The fund has a higher allocation to growth assets such as equities and property and is well-suited for investors seeking long-term capital appreciation to build wealth. With consistent long-term outperformance against benchmarks, this is a great choice for investors looking to benefit from diversified exposure across multiple asset classes.  

10X Income Fund: The 10X Income Fund is constructed to give investors a high level of income and long-term capital stability with cost-effective exposure to different local and international interest-bearing assets. In shorter periods, returns may fluctuate, so the fund is best suited for investors with a time horizon of 3 years or longer. The fund aims to offer long-term capital stability is therefore best suited to those looking to preserve their wealth.  

10X Defensive Fund: The Defensive Fund is best suited to investors who want a steady level of income alongside capital growth at low volatility over the medium term. This is achieved via cost-effective exposure to a range of different local and international asset classes. With a higher allocation to defensive assets like bonds and cash, the recommended time horizon is 1-3 years and longer, as returns may be more volatile over periods shorter than one year. The risk profile of this fund is lower than a medium equity fund, and the majority of the fund is in local assets while still offering offshore exposure.  

10X Moderate Fund: The 10X Moderate Fund is best for investors who want capital growth with a lower level of volatility than a high-equity portfolio over the medium to long term, achieved via cost-effective exposure to a comprehensive range of local and international asset classes. The portfolio includes a higher allocation to growth assets like shares and property, and the recommended time horizon is 3 years or longer, as returns may be volatile in the short term. The fund has offshore and local exposure with the objective of generating capital growth at a lower level of volatility.  

The long-term impact of high fees  

Fees will also play a potentially massive role in the growth of your retirement annuity. There are a few different kinds of fees which you may see charged on your retirement annuity. The typical fees that you may see are: 

Administration fees: These are the fees charged for the administration tasks linked to the fund. These will be such as tax, compliance and reporting.  

Advisor fees: These are the fees levied by a financial advisor for their advice and services. There would be both an initial and an ongoing fee charged. 

Management fees: These are the fees charged for the management of the fund.   

Other fees: These may be charges such as early exit penalties 

The Effective Annual Cost (EAC) is a standard metric which was introduced by ASISA. It is a manner in which you can see all the fees and costs that are associated with owning an investment over a one-year period of time. It includes all fees and costs, such as administration fees, advisor fees, management fees and other applicable fees. Keep in mind that the EAC is just one metric to consider when choosing a service provider. 

All things being equal, you would imagine that a higher EAC would result in there being less returns available to be reinvested and potentially grow over time. Whereas a lower EAC would mean that there are more returns to be invested and potentially compound over the long term. You should be able to see your EAC on your retirement annuity statement. If not, you can request this from your service provider. 10X offers a free EAC calculator as a part of their free suite of online tools. This will allow you to compare the fees associated with your current RA. You can find the EAC calculator here.  

High fees can also impact the growth of your RA over the long term, and starting a retirement annuity early means paying fees over a longer period of time. Let’s look at an example to explain the effect of high fees on your living retirement annuity. We will compare fees of 3% and 1%. 

Let’s assume the following: 

• Investment period of 30 years 
• Initial lump sum investment of R50,000 
• Monthly contributions of R2000 
• Return of 12% per year 
• 6% inflation 

Example 1 (1% in fees): R1.8 million 

Example 2 (3% in fees): R1.3 million 

As you can see from this example, choosing a product with lower fees allows for more of your returns to stay invested and potentially grow over the long term. Higher fees have the potential to minimise the growth of your RA, especially when compounded over the long term. Keeping fees low means minimising their effect on your returns over the long term. Note that this example is for illustrative purposes only, and actual results may vary. You can learn more about fees impact growth here.   

By starting your RA earlier in life and choosing a low-cost provider, you can potentially maximise its growth. 10X has a transparent and low fee structure, typically charging 1% or less on most retirement products. We make use of an index tracking investment strategy, with a more active approach to asset allocation, while always focusing on long-term returns. Fees charged will, however, depend on the product selected and the amount invested. To find out the most up-to-date information on our fee structure, visit our website.  

RAs and the Two-Pot System  

The Two-Pot Retirement System was introduced in September 2024 by the National Treasury. 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.  

Two-thirds of contributions will be invested in the retirement pot, and one-third of contributions will be invested in the 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, therefore, governed by the old rules in place before the Two Pot system came into play.   

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 for these transactions.   

The savings pot should only be accessed in an emergency, such as to settle medical bills. The retirement pot can only be accessed upon retirement, where it is then used to purchase a guaranteed annuity or living annuity. Keep in mind that retirement age in South Africa is currently set at 55. Please consult the latest FSCA guidance for the most up-to-date information on the Two-Pot Retirement System. 

Overcoming common excuses for delaying retirement savings  

You may find yourself regularly coming up with new excuses for delaying your retirement savings, but it’s important to understand when your reasoning makes sense and when you are potentially negatively impacting the possible long-term growth of your retirement savings. Let’s have a look at some of the common excuses.   

‘I don’t earn enough’ - This is an understandable thought, but by just starting out small and contributing consistently, you are putting yourself on the right track and building the habit of saving.   

‘RAs are too rigid’ - Many people feel that RAs are too restrictive and that their savings are ‘tied’ up until retirement. While more restrictive than a tax-free savings account (TFSA) or a Unit Trust, it is important to remember that they serve a different purpose and come with other benefits. Additionally, with the introduction of the Two Pot Retirement System, you can withdraw from the retirement annuity savings pot in times of emergency. 

‘I’ll start next year’ – Perhaps it is time to seize the day and not wait until tomorrow, or in this case, next year. Delaying starting may result in you losing out on time and potential compound growth opportunities.  

While these concerns are common, they shouldn’t hold you back from getting started. Taking action today, even if it’s a small step, can make a big difference to your financial future and give compound growth the time it needs to work in your favour.  

Conclusion: Time and your retirement annuity  

When it comes to retirement savings, time is your most powerful ally. The longer your money stays invested, the more opportunity it has to grow, thanks to the compounding effect and long-term market gains. Starting early also gives you more flexibility, allowing smaller contributions to grow into something substantial over time.   

Combined with low fees, tax benefits, and smart asset allocation, time can make a big difference to the eventual value of your retirement annuity. The sooner you begin, the better your chances of reaching your retirement goals.  With a 10X Retirement Annuity, more of your money goes to work for you. If you need help with setting up your RA, get in touch with our helpful and experienced investment consultants today!