Maximising retirement income: the benefits of direct investment in a living annuity

A living annuity is a retirement investment vehicle that allows you to draw a regular income while the remainder of the funds are invested. It is funded by pre-retirement savings which are then transferred to the living annuity upon retirement, which is currently from age 55 in South Africa. The funds are then invested in selected underlying portfolios and an income drawdown rate is selected. Retirees can choose between either making use of the services of a financial advisor, or they can directly manage their investments within the annuity structure. If you decide to become a direct investor, it’s vital that you are aware of certain key elements of investing and managing your funds. This article will look at the benefits of direct investing and how you should go about it in more detail.  

Greater control over asset allocation 

As a direct investor, you need to ensure that you have a certain level of financial literacy and use this knowledge to customise your portfolios, based on factors such as your time horizons, risk tolerance, financial situation, income needs and market conditions. There is a lot of flexibility and control placed in the hands of the direct investor as you are not being instructed or guided by the advice of a financial advisor (although 10X Investment Consultants have helped thousands of South Africans retire with the facts, and they’re always available to you at no cost). 

As with all investments, the funds invested in your living annuity may be split between various asset classes. You will need to choose between underlying funds that have different weightings of each asset class such as equities, bonds, real estate and cash. Each of the asset classes has different characteristics and are therefore used differently depending on investment goals. Let’s have a look at the main ones in a bit more detail: 

Equities: These are usually chosen for their long-term growth over time. They are the most volatile of the asset classes, but the most likely to beat inflation by a healthy margin over time. 

Bonds: Bonds are less volatile and provide more stability, but are likely to produce lower returns in the long term. 

Real Estate: This may be a good source of steady passive income and also provides a good hedge against inflation. 

Cash: The most stable of the asset classes, but typically producing the lowest returns. 

10X offers a variety of funds which all have a different mix of asset classes, depending on your financial requirements. For example, our flagship fund, the 10X Your Future Fund is a fund which has a large percentage of growth assets like equities and real estate. It’s risk profile shows it has a lower risk than that of a pure equity fund but it is still classified as a High Equity Mixed Asset Fund. The ideal time horizon for this fund would be at least 5 years. History has shown a performance of 11.5% in annualised returns. To read up more on this fund, follow this link. 

Cost efficiency and lower fees 

It’s important to understand the fees and costs that you are being charged on your living annuity. High fees are likely to erode your returns over time, while lower fees will allow for returns to compound over the long term and grow your capital. The kind of fees that you may expect to see charged are: 

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

Administration fees: These are the fees associated with any administration of the fund such as that related to tax and reporting. 

Advisor fees: These are the fees charged by an advisor for the advice that they give you regarding issues such as portfolio selection.  

Many actively managed funds charge a high total fee of between 2 and 3% per annum. These fees will compound over time and this can reduce your net returns. Direct investment on the other hand, allows for the investor to cut out costs associated with research and trading, thus reducing the need for higher management fees. Accessing actively managed funds usually happens through the services of a financial advisor as well, so by going direct, you can also avoid the advisor fees, which will in turn allow for more of your returns to be reinvested and allow for further growth of your living annuity. 

A difference of 2% in fees may seem negligible, but these fees compound over time and ultimately make a huge difference in your end returns. For example, consider a R100,000 investment over 30 years. Let’s imagine a 12% annual return and an inflation rate of 6%.  

If you are being charged fees of 3%, at the end of the 30 years, your investment’s net returns will sit at R231,004. 

If you are being charged fees of 1%, at the end of the 30 years, your investment’s net returns will sit at R398,578.  

Just a 2% difference in fees ends up being a difference of R167,574. As such, the value of minimising fees as much as possible is clear. At 10x, we believe in low fees with no hidden costs.  

The power of passive investing 

Direct investors can take advantage of the power of passive investment strategies, such as the index tracking solutions offered by 10X. Our fund managers aren’t focused on selecting winning stocks but instead, the performance of a variety of indices, for example, the S&P 500. These indices are ‘tracked’ in order to match the total return of the market the index represents. This is done by buying the same security and in the same proportion as that particular index. This type of investment strategy is cheaper when compared to more actively managed funds, because there is less research overhead and trading costs incurred. You can see that data suggests that index trackers outperform active managers more often than not. Passive investing also reduces the risk of drastic underperformance. 

Active management, on the other hand, is where fund managers research different securities in order to select what they feel will be the best-performing stocks, and then choose which of these to buy, sell or hold over time. As mentioned, this does typically result in higher fees, due to the amount of research and trading that goes into the process of active management. The objective here is to beat an index rather than match it. 

10x allows direct investors access to invest 100% offshore in their living annuity, making it an attractive choice for investors wanting to hedge against country-specific risks. Many other well-known service providers are not able to offer this as they do not have the offshore allowance available.  

Flexibility to adapt to market conditions 

It’s important to remember that you, as a direct investor, are able to manage your own portfolio. Direct investing allows the investor flexibility in terms of adapting to the market conditions as they change over time. It’s crucial that as a direct investor, you keep up to date with market conditions, as well as regularly review your living annuity to ensure that it is still meeting your financial needs and goals. After reviewing your living annuity, you may feel the need to make adjustments. One way in which an investor may do this is by adjusting the asset allocation of their portfolio to better meet their financial needs or to fit in better with the current market conditions. 

For example, in a market downturn phase, the investor may wish to reduce their equity exposure and perhaps introduce a larger percentage of bonds. Therefore, reducing the volatility and adding some stability to the investor’s living annuity.  

Avoiding “one-size-fits-all” strategies 

Actively managed funds may not suit the needs of all retirees. Direct investing allows for a more personalised approach where the retiree can select a personalised strategy that may match better with their own unique goals and needs. One retiree may be happy to aim for aggressive growth, whereas another may be looking for capital preservation.  

Having this flexibility will allow you, as a retiree, to feel more in control and more comfortable with the decisions that you have made, with the knowledge that these are most suited to your particular financial needs and goals. It can be overwhelming and there can be a lot to navigate as a direct investor, so feel free to reach out to the investment consultants at 10X who are more than happy to discuss your options with you. They have a wealth of knowledge and expertise at their disposal to assist you in your decision-making and to put your mind at ease.  

In conclusion  

As has been illustrated, there are benefits to investing directly in your living annuity. You will experience lower costs as well as the potential for higher returns and growth over the long term, by reducing the fees that you are paying and saving on the advice fees that you may otherwise have paid to a financial advisor. It is, however, important to ensure that you are financially literate and confident in your decision-making before investing. There are risks involved with making your own decisions and taking full responsibility for your retirement.  

You need to be aware of your risk tolerance and time horizons, as these are crucial in the decisions that you may make around your living annuity. Visiting the 10x website will provide you with resources on retirement, living annuities, tax, estate planning and a lot more, which can help you with any doubts you may have.  

To find out more about the 10X living annuity, feel free to browse through our website or speak to one of our investment consultants. At 10x, we simplify your retirement investments with low fees, a great track record and a simple, straightforward investment approach.