Switching a living annuity to a low-cost provider
can give retirees a big boost financially,
without compromising their lifestyle
While nearly 4 in 5 South African retirement savers worry that they won’t have enough money to live on after they retire, few realise that the fees they pay on their living annuity are probably their single biggest expense, says Andre Tuck, Senior Investment Consultant at 10X Investments. “Switching to a low-cost provider can give retirees a big boost without compromising their lifestyle.”
He points to a second worrying statistic from the 10X Retirement Reality Report 2021 (RRR21): 56% of retirement savers don’t know what they are losing to costs, or say there are no fees at all (of course there are).
NEWSFLASH: Retirees or retirement savers who want to know what it really feels like to pay no fees can take advantage of 10X’s offer to anyone who opens a new retirement annuity, living annuity or preservation fund during this month (November 2021): they will not pay a management fee for six months. This offer includes those who are transferring an existing product from another provider to 10X. After six fee-free months they will start paying 10X’s famously low fee. Please see Ts &Cs. Apply online.
Tuck says that a large majority of retirees put their pension savings into a living annuity rather than a guaranteed annuity because it leaves them in control of their money. Unlike those in guaranteed annuities, they decide how much income they draw (within regulatory limits), how their money is invested, and who inherits the balance after they die.
These rights, however, come with the responsibility to ensure their savings last their retirement years. Tuck says: “While most retirees know that their drawdown rate is an important lever to ensure their savings last, few appreciate that their retirement savings are being depleted by fees as well as drawdowns.”
He gives an example to illustrate the impact of high fees: “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].”
He adds: “If you can afford to draw down at 8% pa, incurring 2% pa less in fees means you could draw down at 7% pa instead of 5% (translating into an instant 40 percent pay rise) without accelerating the depletion of your savings.”
But, he says, drawing down at 8% per annum “will deplete your savings quite quickly … It would be more prudent 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 (depending on your choice of portfolio and future market returns).”
He gives a second example, using a more moderate drawdown (this one includes rand terms): “Assuming a drawdown of 5% from a R4,8 million pension pot, a retiree would receive a pre-tax income of R240,000 pa, or R20,000 per month. At the industry’s average fee they would be paying costs of around R144,000 pa (R12,000 per month), meaning they are paying themselves only two-thirds more than the service providers. Or, from another perspective, almost 40% of the drawdown goes on fees.”
To bring this to life you can work out your own numbers using the 10X Investments’ Living Annuity Calculator.
RRR21, 10X’s fourth annual report, showed that retirement readiness in South Africa continued to deteriorate over the past year, even for those who do have some sort of savings plan. 79% of respondents in this category (up from 75% last year, and 72% the year before) were unsure they would have enough to live on after they retired.
Last year, only 12% of those surveyed were not worried at all; this year that number was down to just 7%. On the other end of the scale, those who felt sure they wouldn’t have enough to live on after they retired increased from 27% to 33%.
“It is important to remember that it is seldom too late to improve your outcome, even if you are already drawing a pension,” Tuck says.
“Another key factor that tends to be overlooked is that living annuity holders can change their service provider, usually without restriction or penalty.”
Since you are in control of your investments and income the option to move might hold little allure. “But,” says Tuck, “if you are paying excessive fees (more than 1% pa in total) being able to switch providers is very valuable.”
Retirees who are unsure about the fees they are paying should ask 10X Investments for a free, no-obligation cost comparison.
RRR21, 10X Investments’ fourth annual report on the state of retirement readiness in South Africa, is based on the findings of the 2021 Brand Atlas Survey, which tracks the lifestyles of the universe of 15 million economically active South Africans (those living in households with a monthly income of more than R8,000).
The content herein is provided as general information and calculations are for illustrative purposes only. It is not intended as nor does it constitute financial, tax, legal, investment, or other advice.
The 10X Living Annuity is underwritten by Guardrisk Life Ltd.
Article by: Andre Tuck
10X Investments is an authorised FSP (number 28250)
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