Few retirees realise that the fees they pay on their living annuity could well be their single biggest expense in retirement, says Michael Rossouw, Senior investment Consultant at 10X Investments: “a 2% fee, for example, on a R5 million annuity amounts to more than R8,000 per month”.
“Another game-changing factor that retirees often don’t know about is that switching to a low-cost provider could boost their financial position significantly without compromising their lifestyle at all,” he adds.
The problem, Rossouw adds, is that few living annuity holders appreciate that their retirement savings are depleted by fees as well as what they draw down.
If you are drawing down at, say, 5% pa, and paying fees of 2,5% pa (plus VAT) you are drawing down almost 8% per year (fees of 2,5% pa is the government’s estimate of the industry average, typically made up of 0.75% for advice, 0.25% for administration and 1.5% for investment management).
Rossouw says: “For the same level of drawdown (8%), you could reduce your fees by 2% and increase your income from 5% to 7%. That is a 40% increase in your income without any change to your overall savings balance.”
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He explains further: “Assuming you draw down 5% from your R4,8 million pension pot, you will receive a pre-tax income of R240,000, or R20,000 per month. At the industry’s average fee rate of almost 3% pa you would be paying costs of around R144,000 pa (R12,000 per month).
“You would be paying yourself only two-thirds more than you pay your service providers. Or, from another perspective, almost 40% of your drawdown goes on fees.”
Moving to a low-cost provider, such as 10X Investments, which charges less than 1% pa in fees, you could draw R28,000 a month and pay fees of R4,000. You are now receiving seven times more than your service providers, which seems a lot more fair.
But, Rossouw cautions, drawing down at 8% per annum will deplete your savings quite quickly.
“The more prudent option,” he says, “would be to keep your income unchanged, and let the 2% pa saving compound within your living annuity. This could add 5-15 years to the sustainability of your income (again, depending on your choice of portfolio and future market returns).”
To bring this to life for yourself insert your own numbers into 10X Investments’ retirement income calculator It will calculate what a sustainable income would be taking your savings balance and your age as well as fees and inflation into account.
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In addition to paying away too much of your savings to fees, there are other good reasons to switch providers, such as bad service, poor planning tools, or inappropriate investment choices. If you are in any doubt, ask 10X to do a free, no obligation cost comparison today to see if there is room for improvement in your LA.
Moving a living annuity to a different provider is a relatively simple process. You submit an application to your prospective annuity provider and give formal notice to the incumbent. The rest happens behind the scenes. If you are joining a low-cost provider there should be no initial fee and no compulsory advice fees or platform fees.
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The content herein is provided as general information. It is not intended as nor does it constitute financial, tax, legal, investment, or other advice. 10X Investments is an authorised FSP (number 28250). 10X Index Fund Managers (RF) (Pty) Ltd is a Manager registered under the Collective Investment Schemes Control Act, 2002. The 10X Living Annuity is underwritten by Guardrisk Life