Navigating Retirement Annuity investments: Understanding EAC, fees, and choosing the right provider

Note: Asset allocations within 10X funds change regularly as we adjust for market conditions. The asset allocations below are correct as of 18th November 2024. Please check the funds page for up to date figures.

Like everyone else, we’re sure you want to retire in security and comfort. And realising the choices you make with your retirement annuity now have a tremendous impact on the future you want is the first step to making it happen.

A retirement annuity is a type of retirement savings investment product that is specifically designed for those looking to save for their retirement in a tax efficient manner. Retirement annuities are considered ‘tax advantaged’ because they allow you to benefit from tax incentives, which further accelerate the growth of your savings.

Harnessing the power of compounding interest, investors who take advantage of retirement annuities will have the interest earned on their contributions reinvested to grow exponentially over the years. The funds invested are inaccessible until the age of 55, ensuring growth over the long term. Once you reach the age of 55, and your RA matures, you can withdraw a portion of the balance as a lump sum, while the remainder must be used to purchase a retirement income product like a living annuity or life (guaranteed) annuity.

When choosing a retirement annuity, it’s essential to understand the implications and impact of fees. Single-digit percentage differences might seem slight, but over the decades in which you invest, high fees can erode your returns significantly. Understanding the fees associated with your retirement annuity will help you in understanding the real return on your investment. One tool that can assist investors is effective annual cost (EAC), which is a standard industry measure that incorporates all the specific costs that are tied to an investment – like administration, advisory fees etc.

Fees will significantly impact the long-term savings of an investment, and understanding your EAC will help you weigh up your options when comparing retirement annuity providers. High fees can diminish net returns, while low fees mean there is more money to reinvest and compound over time.

Inflation is another factor that will play a significant role in how your retirement annuity investment performs. Inflation is the increase in cost of goods and services over time, something that is constant across all nations. Inflation is usually presented as a general percentage increase in price – in South Africa, it has recently hovered around the 6% mark. This is relevant to retirement annuity investors because they will need to ensure that their return on investment beats inflation by a healthy margin in order to grow in real terms.

10X investments is a retirement annuity provider with a reputation for transparency that seeks to minimise fees and provide consistently market beating returns through a strategic asset allocation strategy that leverages index-tracking to keep costs low. By offering direct investment options, 10X eliminates the need for costly advisory fees, empowering investors to manage their portfolios while keeping expenses minimal. This approach seeks to provide returns that outpace inflation, helping retirees preserve purchasing power and ensure sustainable income throughout retirement.

A Quick Retirement Annuity Recap

To start off, let's have a quick of recap what exactly a retirement annuity is: It’s a retirement savings investment product that accumulates money for retirement, at which point those funds will be turned into either a living annuity or life (guaranteed) annuity in order to steadily produce an income during retirement.

Consistently contributing to a retirement annuity can help you build a secure financial future by leveraging the power of compound interest. Over time, more of your returns are continuously reinvested, leading to investment growth. The growth in an RA investment is tax-free, and you will receive tax back on a portion of your contributions.

Fees, Inflation, And Your Investment Strategy

As mentioned above, the fees associated with your retirement annuity provider can have a major effect on your investment growth. Lower fees leave more of your money invested, increasing your potential for capital growth over time. Conversely, higher fees have a similar effect to compound interest, but in reverse: they reduce your savings gradually, limiting long-term growth. Alongside this, many people rely on financial advisors to manage their RAs and other retirement investments, incurring greater costs.

While these advisors come with their own valuable guidance, their fees can also cut into your investment returns over time. When rising inflation is factored in, this erosion can be even more concerning. Inflation reduces the buying power of money over time, and your retirement annuity must be set up in order to maximise your potential gains – or you risk a retirement with a lower standard of living, or even, in extreme cases, outliving your savings.

What EAC Percentage Works For A Retirement Annuity?

The effective annual cost (EAC) includes all the annual expenses associated with an investment product, including fees for management, administration and investment advice, early exit penalties, and any bonuses and guarantees – if they apply. The lower the EAC, the higher your returns, and every fraction of a percent counts. For instance, the often-quoted EAC of 3% per annum may seem negligible, but over a 30-year investment horizon, it can reduce the final value of your savings by up to 60% compared to a provider that charges 1% or less.

10X Investments can offer low fees in part because we provide a direct investment service, without any advisors between us and our clients. There are no advisors or call centres at 10X, but we do offer the expertise of our highly experienced investment consultants at no cost to our clients, so that they can be sure they have all the facts before making the important decision of investing with us.

Because your retirement annuity grows through compound interest, every rand saved on fees and reinvested will produce more you over time. The sooner you look at how to reduce your EAC, the better. Find out what the EAC on your current retirement fund is (you may have to ask your advisor or provider), then use our EAC Calculator to see how much you could be saving with 10X.

Addressing High Investment Fees

The effects of higher investment fees will likely not be visible right away – the compounding of high fees takes place over time. So, a longish time period paying higher fees can seriously undermine the total value of a retirement investment, as you cannot ‘get that time back’ to compensate for it.

For a concrete if simplistic example, take a R100 000 investment at a 6% return over 40 years. With an EAC of 3% that will yield R304 160. With an EAC of 1% the investment returns R688 080. Saving 2% on fees can more than double your returns.

At 10X, the commitment to keeping fees low and transparent means that our client’s investments do better over time and against inflation. This low-cost approach helps ensure that retirement income can sustain itself longer, boosting financial security for clients as they plan for the future.

Fund Performance And Net Investment Returns

There is a distinction between your fund’s headline performance and your real returns. Fund performance refers to the returns generated by the initial investment, and they vary according to the efficiency of the investment strategy and overarching market trends. Net investment returns are what you receive after all fees have been deducted.

In the example above, where you have invested R100,000 in a fund with a 6% annual return, you’d expect to earn R6,000. If your provider charges a 1% fee (R1,000), your net return would be R5,000. If the fees are 2%, you’d only have R4,000. However, you must factor in inflation. If it averages 3% per year, the real value of your net return would be R2,000 or just R1,000 respectively. The difference between reinvesting R2,000 vs R1,000 is immense over time. Of course, 10X aims to beat inflation by substantially more than 3%!

Every percentage point helps, as you need to preserve buying power at all costs. Inflation rates are dynamic, and you don’t know when things will change. And so, you want consistently inflation-beating returns, coupled with low fees and a diversified investment portfolio.

Combatting Inflation With Low Fees And A Diversified Portfolio

By carefully selecting the fund with the right mix of assets for your particular risk profile and stage of life, you can better manage market fluctuations while ensuring your portfolio continues to meet your future income goals. An effective asset allocation strategy not only aims for steady growth but also shields against inflation, helping you maintain purchasing power and financial stability throughout retirement. This balanced approach supports your financial security by ensuring that your portfolio can adapt over time to accommodate market fluctuations and your own personal financial needs.

Ideally, you want to aim for a mix of stability and growth potential. Because a retirement annuity has a long investment horizon, you can consider investing in higher-risk, higher-return assets like equities. The 10X Your Future Fund, for instance, is a cost-effective, multi-asset high equity fund designed to maximise long-term capital growth for investors with a horizon of five years or more. The Your Future Fund (with around 34% offshore investment) has never returned less than 10.7% since inception.

For investors with shorter horizons, the more localised 10X Income Fund is a good option, and for investors seeking a steady level of income together with capital growth at low volatility, our 10X Moderate Fund and 10X Defensive Fund have historically returned 10.7% and 9.1% respectively. These low-fee funds comfortably meet the criteria for a good net return discussed above, giving your investment the best chance at growth.

We realise that choosing which fund to invest in can be a daunting prospect. That’s why we have investment consultants with decades of experience in the industry ready to chat (free of charge). We also provide comprehensive online resources, which range from easy-to-read fund fact sheets through exhaustive FAQs to our webinars and ‘Rands and Sense’ video presentations. We cover topics such as fees, how financial advice compares to direct investment, the differences between index tracking funds against active managers, and a whole lot more. There are no call centres at 10X, so you can look forward to valuable insight from professionals in the industry without waiting hours for a call back.

Benchmarking Your RA Against Other Providers

Traditionally, the management of retirement annuity investments has been less than impressive, with two-thirds of local funds underperforming the market. According to the authoritative S&P Indices Versus Active (SPIVA) report, 67% of funds have underperformed the S&P South Africa Domestic Shareholder Weighted (DSW) Capped Index benchmark over the past decade. There is a two-thirds chance that your current fund is one of those. The 10X Your Future Fund, on the other hand, has consistently outperformed this benchmark for more than 15 years.

We believe in simplicity and cost-effectiveness. We don’t have performance-based charges, and we keep management and administration fees to a minimum – a single management fee starting at 1.04% per annum (including VAT and trading costs). That is the maximum fee 10X charges and it decreases as your investment grows. There are no upfront, advice, or exit fees, and you won’t be penalised if you adjust your investment strategy or need a break from your regular contributions.

To see how 10X compares to your current fund, use our free, no-obligation, comparison report. All you need is your most recent investment statement. If you don’t have that on hand, we will walk you through providing the necessary information.

Switching Providers Made Easy With 10X

It’s simple to switch to 10X because we handle all the admin for you, including liaising with your existing provider, at no additional cost. The process is completely transparent and we keep you updated on progress at all times.

You can also do it all online. All we will need is your ID and proof of address to get going. If you need to exit your application at any time you will be able to log in again and continue from where you left off. If you want to be guided through this simple process or have other requirements – such as not having a South African ID number – simply get in contact with one of our consultants directly. As soon as the switch is complete we’ll let you know, and you’ll be good to go.

You Don’t Need To Be An Expert To Invest With Confidence

Index trackers celebrate their 50th anniversary this year. When the first major tracker was launched in December 1975 by Princeton graduate John Bogle it was heavily derided by a market that believed ‘you can’t buy the averages’. But it turned out you could, in part because of the low fees associated with Bogle’s ‘passive investing’, and that it paid handsomely. Bogle’s Vanguard 500 Index Fund started with $11 million and within 25 years crossed the $100 billion mark. Vanguard now has about $9.3 trillion in global assets.

A great benefit of index tracking is that it reduces the need for research overhead and sector expertise. You don’t have to have an expert view of, for example, artificial intelligence, in order to make a bet on whether large language models or processor chips are where the future lies. The market is working this out for you all the time.

The strength of the 10X Investments’ model is that we use a strategic mix of index-tracking and traditional investments to lower costs and keep performance strong. With 10X, you have a choice of funds suited to every risk profile and time horizon, so you can invest with confidence. Our extensive online resources, from FAQs to videos to blogs, will give you the information and insights you need, and you can talk to our experts at any time, free of charge. Our goal is to inform and empower you, as we have done for many clients for more than a decade.

Confidently Manage Your Retirement Annuity With 10X Investments

In the final analysis, it’s about empowerment. The information and the expertise you need to navigate retirement annuities and plan a better-funded retirement than previous generations could, is right there at your fingertips. Our carefully curated funds deliver benchmark-beating returns and you decide on the strategy best suited to your time horizons. You have the power to choose wisely and set yourself up for a secure and comfortable retirement.