What is a Living Annuity?
A living annuity is essentially an investment product that provides you with an income from your retirement savings. A living annuity gives you the flexibility to choose your income each year (subject to regulatory limits) and how your money is invested. Any remaining capital after your death passes to your nominated beneficiaries. However, in exchange for this flexibility, you take on the risk that you outlive your savings and the risk that your investment returns are poor. This means that your future income could fail to keep up with inflation, or even that you outlive your savings.
- Simplicity and transparency. 10X is rooted in its one, simple, optimal retirement solution. Simplicity permits clear, transparent reports. Transparency and openness enable you to see how your investments are doing at all times. You may access your investment information at any time online.
- Low fees. High costs are a problem with the standard industry living annuity. and these fees are often not disclosed or are hard to find. Our fees are typically less than half the industry average. This will give you 4 to 20* years more income in your living annuity.
- Index funds. Our portfolios track market indices, rather than the whims of a fund manager, as approximately 80%** of actively managed funds underperform corresponding index funds, after fees.
You may purchase the 10X Living Annuity directly or through your financial advisor.
Trustees and corporates, talk to us about setting up the 10X Living Annuity as the default living annuity on your company retirement fund.
*Source: Dimson, Staunton, Marsh and 10X Investments. Based on an initial income of 5% pa.
**Source: General Equity unit trusts vs. JSE All Share Index. Profile Data and 10X Investments, five years to March 2014.
You should consider a Living Annuity if you want to
- determine how your retirement savings should be invested
- choose your initial income
- decide how much income you want to receive annually (i.e. if you desire flexibility)
- leave an estate
The Living Annuity may not be for you if you want to receive a guaranteed income for life.
Although a living annuity places the responsibility of securing an adequate income on your shoulders, it also provides greater flexibility and greater control over your financial affairs. You can choose your investment portfolio, switch providers should you wish to do so and you may even purchase a guaranteed annuity at a later date.Any residual value in your living annuity after your death is distributed to your nominated beneficiaries free of Estate Duty as it does not form part of your estate. Your beneficiaries can elect to receive the residual value as a lump sum or they can opt for it to remain invested in a living annuity.You are obliged by law to draw an income from your living annuity of between 2.5% and 17.5% of your investment balance per year. The risk then is that the amount you want to draw down will eventually exceed the maximum limit of 17.5%. In this case, you may end up with increasingly less income every year.
Choosing a living annuity may appear fraught with complexity and pitfalls. That is why, at 10X, we take a clear and simple approach to our Living Annuity – an approach based on the same philosophy that has made our retirement products so successful. You must consider the following primary factors when selecting a living annuity:
- Your income
- Investment portfolio
These factors are related and should be considered together.
10X provides you with tools to assess the impact of each of these decisions for your personal circumstances. Please visit our Financial Education section to access these tools.
It is important to remember that the total deduction coming off your investment is the income you are drawing and the fees you are paying. Therefore, you cannot determine your sustainable income apart from the fees you are paying. The higher the fees you pay, the less income you can afford to draw down each year.
On the other hand, the returns on your investment portfolio can either increase (positive returns) or decrease (negative returns) your investment value. Your choice of investment portfolio will also impact the income you can safely draw.
Despite the fact that in South Africa, there are many more investment portfolios than there are shares listed on the JSE, living annuity portfolios can broadly be classified as either a high equity, medium equity or low equity portfolio.* A high equity portfolio holds mostly growth investments (shares and property) which offer a high expected long-term return, although this may be volatile in the short to medium term. On the other hand, a low equity portfolio holds mainly defensive investments (bonds and cash) which provide lower long-term returns, but which are more stable over the short term. A medium equity portfolio sits between the two. In the 10X Living Annuity you can switch portfolios at no cost (although frequent switching can impact negatively on your return and we therefore do not recommend it).**
Example. The best way to illustrate the impact of your Living Annuity income, fees and investment portfolio is with an example. Consider a 65 year old who has accumulated R1million for his retirement and is going to draw an initial income of 5% of his savings. This translates to an income of R50 000 in the first year or R4 167 per month. He then increases this income each year by inflation. The risk is that the amount he wants to draw down will eventually exceed the maximum limit of 17.5% of his remaining savings. In this case, he may end up with increasingly less income every year.
This example is shown in the chart below. It depicts the projected monthly income in today’s money (i.e. after stripping out inflation) in average market conditions. The first chart assumes a fee of 0.86% pa. This is the maximum fee charged by 10X. In fact the more money you have the lower our fee is. The second assumes a total fee of 2.5%, which is not uncommon in the industry.
Consider the fee impact in a medium equity portfolio. With 10X, he could have drawn his desired income, growing with inflation from age 65 to 93. In contrast when paying a fee of 2.5%, his income would only have kept pace with inflation up to age 84. This is nine years less.
You will notice that for similar portfolios, 10X’s low fee advantage could provide you with additional income ranging between four and twenty years!
It is evident that the sustainability of your income is very different depending on the portfolio you choose and also the fees you pay. Please visit our Financial Education section to access the tools that will help you determine a sustainable income for your personal circumstances.
*National Treasury: “Despite the wide range of investment choices on offer, individuals appear to be investing their living annuity policies in broadly similar portfolios.”
** A study performed by Allan Gray on South African investors over a 10 year period showed that those who switched funds on average lost more than 4% every year over the period. You are permitted a maximum of four switches per year at 10X.