Optimising your retirement annuity investment strategy

A retirement annuity (RA) is a tax-efficient investment vehicle for long term savings and a popular choice for investors looking to secure a steady income stream when they reach retirement. With a retirement annuity, you would invest a portion of your monthly salary (or a regular lump sum) and your chosen RA provider will use these contributions to invest in diversified assets, usually a combination of stocks, bonds, property, and cash. These investments have the potential to grow over time, and once you reach retirement, can be converted into a living annuity or life (guaranteed) annuity – from which you can draw a steady income in your retirement years.  

A major appeal of retirement annuities lies in their ability to defer taxation on investment growth until you withdraw funds as an income in retirement. There is no tax on interest, dividends, or capital gains within the RA, and this tax-free growth allows your savings to compound more efficiently. Moreover, contributions to a retirement annuity are made from your gross income (before income tax is deducted), and this in turn reduces your taxable income.  

For example, if your gross salary is R500,000 per year and you contribute R75,000 to your RA, your taxable income becomes R425,000 (you can contribute up to 27.5% or R350,000 per annum to your retirement annuity). This not only reduces your overall tax liability but could potentially lower your tax bracket. These funds are also typically protected from creditors, offering another layer of financial security. The majority of the fund is not easily accessible until you reach retirement age (55 is the minimum retirement age in South Africa), ensuring your money remains invested for its intended purpose – retirement income. 

Some investors avoid retirement annuities despite them being one of the best long-term investment options on the market. According to 10X Investment Consultant Michael Rossouw, many investors reject retirement annuities due to four main issues: poor investment management, incorrect asset allocation, high fees, and a lack of understanding of total returns and tax benefits. However, these issues are not inherent to retirement annuities themselves and can be avoided by educating yourself on portfolio management and optimising your retirement annuity investment strategy.  

 The 10X Investments Retirement Annuity is designed to outperform the market, backed by a track record of consistent results, low fees, and well-diversified funds designed to balance risk and growth potential. To explore how 10X can enhance your retirement savings, you can request a free cost comparison report and see firsthand the benefits of low costs and strong performance on your future financial security. 

In this quick read, we will discuss how, with optimised portfolio management, strategic asset allocation and low fees, retirement annuities can be highly effective long-term investment vehicles.  

Understanding retirement annuities 

A retirement annuity can play a central role in your retirement strategy, helping you secure financial stability in your post-retirement years by converting your accumulated RA savings into a reliable income stream. When you contribute to an RA, your money is invested in various asset classes like equities (stocks), bonds, and cash. These investments are managed by your RA provider, and the goal is to keep growing your contributions in line with inflation as the underlying assets appreciate at a better rate.  

As your retirement approaches, the growth within your RA can provide a substantial fund that converts into a steady income stream. When you retire, you are obligated to transfer at least two-thirds of your accumulated savings into either a living annuity or a life (guaranteed) annuity. The other third can be withdrawn, and you have a R550k tax-free portion within that withdrawal. 

Addressing investment management issues 

Poor management of retirement annuities typically results in sub-par investment returns, meaning the funds did not grow as efficiently as they could have. This happens when fund managers fail to achieve performance benchmarks, such as those set by relevant market indices. Poor strategic decisions, high fees, and inadequate asset allocation contribute to this underperformance. Over time, this not only diminishes the expected growth of the retirement fund but can also significantly impact your financial security, leading to potentially lower income in retirement. 

Historically, the management of many retirement annuity funds has not met market performance standards. In fact, by mid-2024, SPIVA reported that 67% of these funds underperformed compared to the S&P South Africa DSW Capped Index over a ten-year period. 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. 

At 10X, our consultants are available to speak with you frere of charge regarding how your own returns compare with market averages so that you can identify any management issues and explore ways to potentially improve your investment outcomes.  

The 10X Your Future Fund aims to outperform market benchmarks through a strategy focused on low fees and strategic asset allocation. This fund utilises index tracking to lower costs and give a better chance of performance relative to market benchmarks. By tracking broad market indices, this strategy minimises the risks and costs associated with active management, where managers often attempt to beat benchmarks by picking a selection of winning stocks. Index tracking ensures that the fund's performance closely mirrors that of the index it follows, which SPIVA data suggests leads to a better chance of more predictable returns.  

By reducing the drag on investment growth typically caused by high management fees, the fund ensures more of your money remains invested and compounding for you over time. Additionally, the fund uses a diversified investment approach, aligning with global and local market trends to maximise returns relative to risks. This strategic approach helps the fund to provide better growth opportunities for retirement savings.  

Getting asset allocation right in your retirement annuity 

If you’re purchasing a retirement annuity, you most likely have a longer investment time horizon, meaning you can afford a more aggressive approach to investing. A longer time horizon usually means a higher risk tolerance, and you are more likely able to recover from potential market downturns or financial setbacks. One mistake many investors make is becoming too conservative with their investments too early on – favouring short term defensive assets like cash and bonds. While this can seem like a safe bet as you are exposed to less risk and volatility than you would be with equities, for example, the potential returns are generally lower too.  

For shorter time horizons, defensive assets like bonds and cash can be appropriate. However, retirement annuities are typically long-term investments and playing it “safe” by favouring defensive assets too early can end up hurting your retirement strategy rather than helping it along. Over the long term, being overly conservative can undermine the growth of your retirement fund, making it harder to keep pace with inflation and potentially jeopardising your financial security in retirement.  

For example, let’s say you have decided to start contributing to a retirement annuity (RA) at age 25, with an initial monthly contribution of R833 (equivalent to R10,000 annually). To keep up with inflation, you plan to increase your contributions by 10% each year. Your RA is invested in a "medium risk" portfolio with an expected annual growth rate of 7%, while the fees charged by the fund amount to 3% annually. Inflation is assumed to average 6% per year. 

Over 30 years, until age 55: 

Nominal future value: The total savings would grow to approximately R6,015,915 if fees are not considered. However, with the 3% annual fees factored in, the nominal future value is reduced to about R4,191,139.    Real value in today’s terms: After adjusting for 6% inflation, the purchasing power of your savings at age 55 is equivalent to around R1,213,600 in today’s money. 

This is a common pitfall that catches plenty of investors off guard: without realising it, by not fully understanding the impact of fees and how inflation reduces your money's buying power, you might end up with a retirement plan that doesn't grow your wealth as much as it could. In this case, choosing a medium-risk investment might seem like the safest option but it doesn't offer as much growth potential as a higher-risk, higher-equity option might over the long term. 

The real value of your retirement savings is what that money will be able to buy you after adjusting for inflation. R100 ten years from now will not buy you what R100 buys you right now. This is the only way to get a clear picture of whether you’ll have enough to live on in retirement. Without this insight, many people end up locked into savings plans that cost a lot and don't deliver enough growth, failing to build the wealth they need for a comfortable retirement. 

Try 10X’s retirement annuity calculator or request a free cost comparison to see if you could be doing better with 10X. 

By selecting a fund with the right mix of assets to suit your particular time horizon, you can better manage market fluctuations while ensuring your portfolio continues to meet your future income goals. A strategic asset allocation strategy aims for steady growth that beats inflation by a healthy margin, 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. If you have a longer 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.  

It's equally important to diversify your asset allocation rather than overexposing your money to individual investments. For example, if you concentrate your investments in a single asset class like property or specific stocks, you face a higher risk of significant losses if those investments decrease in value. The same goes for investors with multiple different investment products. For example, if you’re invested in a retirement annuity and a preservation fund, and both are focused heavily on assets like local stocks, a downturn in the local stock market could negatively affect both of your investments simultaneously, leading to greater losses. 

By holding a variety of assets, you can smooth out the ups and downs, and better weather market volatility, as the negative performance of some assets can be balanced out by positive performance in others. In short, diversification across multiple asset classes allows you to benefit from different economic cycles, enhancing the overall performance of your portfolio and reducing risk pertaining to any specific asset class.  

Equities, for instance, have historically outpaced inflation by an average of around 7% annually, offering a solid buffer against rising prices. Offshore investments further mitigate risks tied to the South African economy, offering a safeguard against a potential depreciation of the Rand.  

Rather than relying heavily on any single asset, a smart move could be to invest in a multi-asset fund like the 10X Your Future Fund. This fund mixes different types of investments such as equities (stocks), bonds, and real estate across various regions and sectors. This diversification helps reduce risk because your money isn't tied to the success of just one type of investment or market. 

Mitigating the impact of high fees on retirement annuities 

Alongside asset allocation, another important factor to consider when optimising your retirement annuity strategy is the fees you pay on your investment. High fees, coupled with an overly-conservative approach to asset allocation can be a recipe for disaster, resulting in a failure to keep pace with inflation and a higher risk of running out of money in retirement. Many providers charge over 3% per year for a retirement annuity – which might sound insignificant in the grander context of your retirement plan, but the impact of negative compounding over time is substantial (potentially reducing your retirement funds by as much as 30% over 20 years). After factoring inflation into the equation, the results are even more concerning.  

This is why fees are a crucial consideration when choosing a retirement annuity provider. Low fees can facilitate long-term investment growth, allowing more of your funds to be reinvested, whereas high fees can stack up over the long-term, significantly diminishing your capital and reducing the total value of your savings. Inflation, when combined with high fees, can significantly erode the real value of your retirement savings. As inflation increases the cost of living, the purchasing power of your annuity’s returns diminishes.  

Choosing a retirement annuity provider with low fees is one way to ensure that you have substantial funds to carry you through retirement. You can check all the fees you are paying by requesting the Effective Annual Cost (EAC) from your provider. By comparing the EAC and fund performance across various retirement annuity providers, you can identify which provider can offer the best retirement annuity product for you. A lower EAC is a good sign as this means more of your money is being reinvested and put towards generating stronger returns. 

 If you're paying around 3% and want to reduce fees to boost your returns, you can consider looking into other providers – like 10X Investments, which offers rates below 1% annually. You could take it a step further and use our EAC calculator to see how much you could save on fees with 10X.