Understanding the implications of investing in multiple retirement annuities

Retirement Annuities should be integral to your financial plan as a pre-retiree. They are tax-efficient, long-term investment savings vehicles that are used to save for your retirement. You can contribute regularly (monthly), or you can contribute lump sum amounts, depending on your circumstances and financial needs. The idea is that once you retire, these funds will be able to provide you with an income during your retirement years.  

Some investors choose to invest in multiple retirement annuities for various reasons, such as selecting different underlying investments for each retirement annuity or using different service providers for different retirement annuities. In this article, we will take a further look at the advantages and disadvantages of investing in multiple retirement annuities. 

A brief overview of retirement annuities  

A retirement annuity is a long-term savings investment where you can invest your money in a variety of different underlying investment portfolios, allowing it to grow, ideally over a long period of time, whilst taking advantage of compound interest.  Once you reach the age of 55, you will have the option of withdrawing from your retirement annuity. At this stage, you can take a cash component, if need be, and the remainder of your retirement annuity can be transferred to a living or life annuity. The annuity will then provide you with a regular income through your retirement years.  

Retirement Annuities offer attractive tax advantages. The contributions that you make to your retirement annuity are tax deductible. As such, they can effectively move you into a lower tax bracket, which will then reduce the amount of tax that you need to pay. Retirement annuities offer great freedom in terms of contributions that you wish to make and also in terms of the underlying investments you wish to invest your funds in.  

You can contribute to your retirement annuity monthly, or via lump sum deposits if you prefer, or even a combination of both. The minimum monthly amount varies from supplier to supplier. The 10X retirement annuity allows for a minimum monthly contribution of R500 or an initial minimum lump sum contribution of R5000. You can also pause payments if you need to – flexbility and suiting your changing circumstances is key.  

You are permitted to invest in a range of different underlying portfolios in order to make sure your retirement annuity is balanced and diversified across the various asset classes like equities, bonds, real estate and cash. Retirement annuities are governed by the Pensions Fund Act, and one of the regulations issued under this act is known as Regulation 28. This is a regulation that applies to all retirement products in South Africa. It puts a cap on the percentage of your retirement annuity that can be invested in certain asset classes, such as offshore or in equities. For example, a maximum of 45% can be invested offshore. The idea behind these limitations is to ensure there is diversification in your portfolio in order to limit your risk. 

Holding multiple retirement annuities 

It is possible to hold multiple retirement annuities in South Africa. You are able to contribute a maximum of 27.5% (up to a maximum of R350 000) of your taxable income in order to take advantage of tax deductions. This 27.5% applies to contributions across all retirement products, including provident funds, pension funds and retirement funds.  

Investors may wish to invest in multiple retirement annuities for various purposes. You may want to diversify each retirement annuity and invest each in a different mix of underlying investments to take advantage of market gains in certain asset classes and mitigate against any potential losses in other asset classes. You can also take out retirement annuities with a variety of different service providers, so if one particular provider does not perform, you are hedging your bets by using a mix of different service providers. You could use different retirement annuities to stagger your retirement and choose different underlying portfolios accordingly. If you earmark one for a later retirement date, you may wish to select a more aggressive portfolio structure and vice versa. 

There are also benefits to having just one retirement annuity. It does keep things more simplified and streamlined, making it easier to monitor overall performance. It is also more cost-effective to have one retirement annuity. Each retirement annuity will have fees associated with it, so if you have multiple retirement annuities, these costs, usually administration costs, will end up adding up over time and, therefore, erode your savings.  

The impact of fees on investment savings 

There are various fees that you might expect to pay on your retirement annuity. The fees include management fees, administration fees and advisor fees.   

Management fees: This refers to the fees charged by a fund manager for actively managing the fund and the selection of the underlying investments with which the investment is invested.  

Administration fees: These are the fees charged by the service provider for the administration involved with keeping the fund up and running, such as record keeping.   

Advisor fees: The fees which an advisor charges you for the advice they give you for setting up and managing your retirement annuity. There is usually an initial fee and then an ongoing/annual fee.  

If you do have multiple retirement annuities, it is even more important that you are aware of the fees that you are being charged on each of your retirement annuities. The cumulative effect of fees across multiple retirement annuities can significantly erode your savings over time.   

Understanding the Effective Annual Cost (EAC) of your retirement annuity is a great place to start when looking into and comparing the fees associated with your retirement annuities. This refers to all of the expenses associated with your investment product over one year. This includes all management, administration and advisor fees, penalties, performance bonuses and the like. If the EAC is lower, then this means that your returns are greater, and these returns can compound over time and lead to more growth in your capital. If the EAC is higher, this will result in lower returns and over the long term, your capital will be negatively affected. Here is a link to our EAC calculator, which will help you see the impact of EAC on your capital. 

The impact of inflation   

Inflation has a negative impact on the purchasing power of your money over time. It erodes the value of your money and reduces the amount of goods and services that can be purchased with a certain nominal value of money from one year to the next. It also erodes the purchasing power of your investment. Inflation in South Africa has historically been around 5% to 6%, so this is something which we need to bear in mind when doing our financial planning.  There are some strategies that we can put in place to try and mitigate the effects of inflation on our retirement annuity. Let’s have a look at these:  

• Asset Allocation: By investing in a diversified portfolio, you can help combat the effects of inflation on your investment. Equities typically provide highest returns over time (although with the biggest risk of market volatility), so you want to ensure that you include equities in your portfolio, as well as ensuring that a percentage of your investment is invested offshore. By diversifying, you are ensuring that you position yourself in the best possible way to beat inflation and protect yourself from potential market volatility. The 10X Your Future Fund aims to try and beat inflation by 5.5%. 
• Regularly Review Your Portfolio: By regularly reviewing your portfolio, you are ensuring that it is best suited to the current market conditions and your financial needs as they change and evolve over time. 
• Choosing a Service Provider with Low Fees: High fees further erode the returns that you receive on your retirement annuity. High fees compounded over time will significantly impact the growth of your retirement savings. You want to ensure that you are with a service provider who charges low fees so that the returns you make on your investment can rather be reinvested and add to the growth of your funds over time. 10X’s retirement annuity is an affordable option with its low fees and excellent long tern performance. 

Fund performance vs. net investment returns  

When gauging the performance of your retirement annuity, it’s important to look at the net investment return. This refers to the actual returns that you receive after all costs and fees have been deducted. Fund performance refers to the returns that you receive, but this is before any costs have been deducted. These could be costs such as advisor fees or administration fees.    

For example, let’s consider 1% in fees versus 3% in fees with an inflation rate of 6% to illustrate Net Investment Returns and the effects of lower fees (1%) versus higher fees (3%). If you invest R100,000 and the fund returns 12%, your investment value is equal to R112,000.    

Scenario 1: If the fees being charged on the investment are 1%, you will need to pay R1120 in fees. Your return is effectively R10,880 which you will then need to adjust for inflation. An inflation rate of 6% means that the actual value of that money is R5,600.    

Scenario 2: If the fees being charged on the investment are 3%, you will need to pay R3,360 in fees. Your return is now R8,640 which you will then need to adjust for inflation. An inflation rate of 6% means that your money is effectively worth R3,360.  There is a clear difference between 1% in fees and 3% in fees. If we take this example and apply it over a period of 30 years, we get the following:  

1% in fees: With 1% in fees, the net return is equal to R398,578 

3% in fees: With 3% in fees, the net return is equal to R231,004  

As fees compound over time, the difference becomes even more substantial. As such, the importance of low fees should never be understated.   

Another attractive feature of retirement annuities is the fact that the returns are tax-exempt during the accumulation period, meaning that all returns earned can be reinvested without any tax deductions, thus allowing returns to compound and grow, which results in more savings going towards your retirement years. 

Asset allocation and strategic investing 

Asset allocation is an important tool in your investment toolbox. By being strategic about your choice of underlying assets, you can mitigate against risk factors such as market volatility while also reaping the benefits of market growth. Diversifying your portfolio across different asset classes, such as equities, bonds, real estate, and cash, allows you to protect your retirement annuity to a certain extent against any big losses in specific asset classes.  

Your risk tolerance and the time horizon you have afforded you will help to determine which of the underlying funds you will choose to invest in. 10X investments offer a wealth of different funds to invest in, depending on your risk tolerance, financial needs and time horizons. You can review the available fund choices and find the best match for your needs. Fund selection can be a lot to navigate, so reach out to the experienced investment consultants at 10X for any further information that you may require  

Investing offshore is an intelligent way of diversifying your portfolio and mitigating against any local currency and political risk. However, you’ll need to keep in mind that Regulation 28 of the Pensions Funds Act states that you may not invest more than 45% of your retirement annuity offshore. This is to help ensure that investors have adequately diversified portfolios.  

Final thoughts on retirement annuities

As you have seen, there are some important aspects to consider when opening multiple retirement annuities. It can be a strategic way of utilising different service providers, as well as a way to set up each investment with different underlying portfolios. If you want to keep things more simple and cost-effective, you may prefer to rather go with a single retirement annuity. Remember to do your research and decide which scenario is more beneficial to you. 

In order to maximise your retirement savings, you want to make sure that you are choosing a service provider that offers low fees. It is prudent to choose a service provider like 10X who, in addition to charging low fees, also offers excellent service and produces superior long-term results. For more information, feel free to speak to one of our consultants regarding the 10x retirement annuity.