Playing The Long Game: How Fees Impact Your Living Annuity

Fees are the biggest predictor of your investment’s returns. The higher your fees, the lower your returns. It’s that simple. And when you’re drawing an income (or possibly your only income) from that investment in retirement, the impact fees have on your lifestyle is even more significant. 

Upon stepping away from your career, your retirement savings need to keep you financially secure for the rest of your life – and if you have been diligently saving for your retirement over the years, you want those savings to work for you, post-retirement. If you are on a company pension or annuity scheme, once you retire you will be obliged, by law, to use at least two-thirds of your retirement savings to buy an annuity. Rather than the stressful decision it’s often made out to be, by arming yourself with the right facts and understanding the major levers of investment success, this could be a tremendous opportunity to improve your future prospects.

There are two kinds of annuity –  a life (guaranteed) annuity and a living annuity. Both are retirement savings investment vehicles that make periodic, usually monthly, income payments. Life (guaranteed) annuities generally provide a fixed income for life regardless of economic conditions. Living annuities are far more flexible, and can outlive you and be passed on to your beneficiaries. While no retirement savings investment product is without risk, the 10X Living Annuity offers great advantages in all your investment options, in the amount and frequency of withdrawals, and – the focus of this article – in the fees.

Living Annuities: A Quick Recap

A living annuity is a way to invest your accumulated retirement savings so that those savings can pay you an income and still have the potential to grow. Because your savings are invested via the chosen fund in a range of interest-bearing assets, the investment generates returns which can provide an income. If those returns are more than the sum of the income drawn by you, inflation, and the fees you pay on that investment, your investment will grow. Unlike a life (guaranteed) annuity, living annuities also offer flexibility in terms of investment options, payout frequency, and withdrawal amounts. 

Interested in learning more? Check out our Living Annuity FAQ for answers to all your burning questions and explore our blog on retiring with control and flexibility to empower your retirement planning.

Understanding how living annuities work, along with the important factors to consider before investing, can help ensure your savings last throughout retirement. Key factors include understanding your effective annual cost and how fees affect your returns. Oftentimes, retirees don’t pay much attention to the impact of investment fees, as many fail to realise how much high fees can decrease investment returns over time. In this article, we’ll discuss why fee considerations are incredibly important when making decisions regarding your living annuity, and how high fees can greatly reduce your long-term returns if you’re not careful. 

At 10X, we strive to offer our clients low fees, transparency, and superior returns. We aim to make investing as straightforward as possible, with no hidden costs or unexpected fees, and all the information you need to build your retirement plan right at your fingertips – and we do all this without the need for call centres or chatbots. When you get in contact with a highly-experienced 10X consultant, you can expect helpful feedback from reliable professionals without waiting weeks for a response.

Keeping An Eye On Fees

There are three core components you need to keep an eye on regarding your living annuity; inflation, drawdowns, and fees. These form part of what we like to call the ‘golden equation’, but we’ll touch more on that later. For now, let’s run through why fully comprehending your fees is vital for sound investment decisions. 

One of the worst mistakes an investor can make is overlooking the fees they pay to their living annuity provider. Fees may not affect the fund performance itself, but they can impact your net investment return (your return after deducting total fees) and if you’re not picky about your provider, you may end up sacrificing a substantial amount of capital to the costs of managing your investment. 

Fund Performance And Fees

Fund performance refers to the total returns generated by your chosen living annuity , which can vary depending on market conditions and how well the fund's investment strategy works. Fees, on the other hand, are the costs for managing your investment. While fees don’t directly impact the fund’s performance, they do reduce the returns you, as an investor, actually receive. The returns you get after fees are deducted is called your ‘net return’.

For instance, if you invest R100,000 in a fund with an 8% annual return, and your provider charges a 1% fee (R1,000), your net return would be R7,000. It’s important to focus on net return because that's what you actually take home. Additionally, consider inflation – if inflation is 3%, the real value of your return would be R4,000.

If fees were higher, say 3% (R3,000), your net return would drop to R5,000, and after adjusting for 3% inflation, you'd be left with just R2,000 in real value. This demonstrates why low fees are essential – they help you retain more of the fund’s returns, boosting the long-term growth of your retirement savings.

The Negative Effect Of High Fees

Fees play a crucial role in the growth of your investment. Low fees can enhance your investment’s growth, while high fees can significantly diminish it. Over time, high fees reduce your returns because they compound against you, gradually eating away at your investment value. In contrast, low fees allow more of your returns to be reinvested, maximising the benefits of compounding in your favour.

Consider this scenario: two investors each start with R1,000,000 saved for retirement. Investor A pays 1% in annual fees, while Investor B pays 2%. Over a 30-year horizon, the fee disparity results in a significant gap. Let’s say both investors achieve an average annual return of 7% – Investor A could accumulate approximately R7,613,000, while Investor B ends up with around R6,022,000. The difference of over R1.5 million highlights just how impactful fees are on your retirement savings. 

In short, lower fees, combined with sustainable drawdown rates, can help stretch your retirement savings and provide a stable income over the long term. At 10X Investments, our low fee structure (starting at 1.04% and decreasing the more you invest) ensures that more of your money is reinvested, leading to better long-term returns compared to the typical 3% or higher fees common to the industry.

The Double Threat Of Inflation And High Fees

In addition to high fees, inflation can heavily affect your investment returns. The South African annual inflation rate sits at around 4-7%, so if your net return is less than that (before your draw income), you’re essentially losing money. Coupled with high fees, inflation can be detrimental to your long-term gains. Unfortunately, inflation is inevitable, but you can choose to avoid high fees. Low investment fees allow you to maximise your living annuity returns, despite inflation.

As inflation fluctuates, many investors aren’t sure if their retirement savings will be enough to keep them financially secure. If this sounds like you, our living annuity calculator can be used to build your retirement plan and determine if your existing savings have you on track towards your retirement goal. Luckily, with a living annuity, you can adjust your withdrawal amount and frequency to make sure you’re not taking out more than you’re getting in returns. 

About The Golden Equation

The Golden Equation is a formula you can use to help you maintain financial stability and make sure you don’t run out of money in retirement. It looks like this:

Drawdowns + Fees + Inflation ≤ Return on Investment

This means that the combination of your drawdowns (the money you withdraw annually), fees (the costs associated with managing your investments), and inflation (which erodes purchasing power) should not exceed the return your investments generate. Keeping these factors in balance helps preserve your retirement savings and ensures your capital can last for the long term.

Determine Your EAC

Effective Annual Cost (EAC) is a standard metric introduced by ASISA to help investors compare the total cost of owning an investment. The EAC includes all expenses, allowing you to see the true cost of your investment and assess which provider offers better value for money.

A lower EAC generally means that more of your investment is working for you, while a higher EAC will reduce the potential value of your investment over time. Therefore, choosing a provider with transparent and low fees is key to enhancing your long-term investment returns.

At 10X Investments, we focus on offering simple, transparent retirement solutions. Our fee structure is straightforward, with one all-inclusive fee covering both investment management and administration. There are no hidden penalties, loyalty bonuses, or extra guarantees, meaning that more of your money is invested rather than being eaten up by fees. 

If you’re curious what you could be paying with a 10X Living Annuity, take a look at our EAC calculator for a rough figure to get you started. 

Why Are Traditional Fees So High?

Traditional investment fees are often high due to layers of management fees, advice fees, and hidden costs. To top it off, many people still choose to pay financial advisors for personalised guidance, but these fees gradually erode their capital over time. Because traditional advisors are often higher-touch and seem confident in their predictions, their fees are usually higher. However, as an astute investor, you can avoid these expenses by selecting a low-cost supplier that emphasises efficiency and transparency (and you don’t have to forgo the relationship either – our investment consultants are always there for you).

10X Investments is set up to help you save by offering an easy-to-understand, low-fee structure and empowering you with online tools and expert consultants. Our goal is to eliminate the need for paid advice, allowing you to manage your investments independently, make informed decisions, and reduce the need for costly financial services – ensuring more of your money is invested and compounded over time. 

Take control of your retirement planning by trying out our handy EAC calculator and requesting a free cost comparison report. These resources help you understand the full cost of your investments and identify potential areas for cost savings. By making informed decisions about fees and returns, you can maximise the growth of your retirement savings, and with 10X’s transparent fee structure and expert support, you have the power to secure a financially sound future without relying on costly financial advisors. 

Watch Out For Hidden Costs

As mentioned, working with traditional living annuity providers can often come with hidden costs like transaction fees, administration fees, and other charges that aren’t immediately clear. Many South African investors fail to realise that they’re paying fees of over 3%, and some may not even realise they’re paying fees at all. 

Hidden costs can take investors by surprise, leaving them unprepared and rightfully annoyed. This is why it’s a good idea to make sure you’re fully aware of your total fees before working with a specific provider. If you’re already with a living annuity provider and are unsure of your total fees, now is the time to find out. 

There are several kinds of charges attached to retirement savings, from management to performance fees. Management fees are exactly that – the basic cost of managing your money through good times or bad. Performance fees are incentives designed to reward investment advisers for making good choices and beating their benchmarks. We think making good choices is simply what we should do. With 10X it’s you who gets those rewards, because we do not charge performance fees.

There are also other fees which may not be immediately apparent, such as transfer and exit fees incurred when an investor moves his or her living annuity to another provider. 10X, however, does not charge transfer fees, because we are confident that having found us, you won’t want to leave, and if you do, you shouldn’t be penalised for it.

All of the above-mentioned costs can quickly add up, making it important to choose a provider that keeps fees low and offers full transparency. At 10X Investments, the fee structure is designed to be simple and cost-effective. We charge a single management fee starting at a maximum of 1.04% per year, which includes VAT and trading costs. As your investment grows, this fee decreases. Plus, as mentioned, there are no hidden costs – no upfront fees, advice fees, exit penalties, or charges for adjusting your strategy.

By choosing 10X, you can avoid many of the typical fees found with other providers, such as performance fees or excessive administration charges, ensuring more of your money is invested and compounding over time, rather than being diminished by unnecessary fees.

What To Do About Fees?

High fees, hidden costs, and forking out funds to a financial advisor are often “harmless” at first, but can quickly bore a hole in your long-term returns. When the fine print is overlooked for an unrealistic bigger picture, it can result in your hard-earned money slipping right through your fingers. 

With that in mind, understanding fees is crucial to making smart investment choices, which could mean the difference between a comfortable retirement and one predicated by constant worry as you age. Getting a free cost comparison from 10X is a smart way to find out exactly how much you are paying with your current provider, and how much you could be saving with 10X Investments. 

When you sign up for a cost comparison report, we’ll analyse your EAC and existing fees and compare them to our own. We’ll then provide you with a report projecting the growth of your retirement savings over a set period. Our cost comparison report and EAC calculator exist to give you clarity on the state of your savings, so you can determine your next course of action for yourself.

Evaluating Low Fee Providers vs. Traditional Advisors

A traditional financial advisor offers full portfolio services, including financial planning, investment guidance, and step-by-step assistance when it comes to managing your living annuity. These advisors tend to make the final investment decisions on your behalf. 

On the other hand, a low fee provider like 10X offers straightforward, unique, low-cost investment solutions with experienced investment consultants ready to discuss your investments without the high consultation fee. By relying on index tracking and proprietary strategic asset allocation models, low fee providers can keep costs down while maintaining solid returns for investors in the long-term. 

Our experienced consultants can discuss different investment considerations with you, such as potential returns, fees, asset allocation, and more, but the decision on what to do with your living annuity ultimately rests in your hands. While we are happy to consult on the various factors surrounding your living annuity at no additional cost, you are free to make your own investment decisions. Indeed, that’s what’s great about a living annuity!

Confidently Transition To Direct Investment

Investing in a living annuity doesn’t have to be complicated, and you don’t always need an advisor to make sound decisions. Educating yourself is a powerful way to gain control over your investments, nevermind the money you’ll save on advisory fees. It all starts with defining clear financial goals and understanding your personal risk tolerance. Sustainable retirement income hinges on goal setting for the short, medium, and long-term – so that your money lasts throughout your retirement.

With access to online calculators and tools, you can fine-tune your investment strategy:

• A Living Annuity Calculator can help you determine the ideal income drawdown and how long your savings could last.
• A Cost Comparison Report can assist with comparing providers.
• An EAC calculator can be used to determine your total fees.

While calculators and reports can sharpen your strategy, portfolio management tips will inform you on how to manage your investments independently. Dig into topics like offshore, sustainable drawdowns, and balancing market volatility with a long-term outlook. Stay informed, but avoid overreacting to short-term market shifts – your living annuity works best with a steady, consistent approach.

With the right tools, managing your living annuity doesn’t need to involve expensive advisory services. You can invest confidently, save on fees, and maintain control over your financial future. For additional insights, check out our webinars, explore our blog, and learn more about 10X’s approach to retirement planning and living annuities. Secure your retirement with knowledge, tools, and smart decisions – no advisor required.