“I don’t believe in retirement annuities,” say investors. Here’s why they say it, and how they can do better.

10X Investment Consultant Michael Rossouw has spoken to thousands of investors over the past decade and all too often he hears the words, “I don’t believe in retirement annuities.” Which is strange, as Michael and others in the industry will tell you an RA’s is one of the best long term investment options. So why the dissonance? Why is it that investors feel this way about retirement annuities? Michael’s take is that it boils down to 4 key issues.

Did you know you can speak directly to Michael about your retirement planning? There are no call centres at 10X, just experienced professionals ready to help. Simply get in touch.

Poor investment management

Unfortunately, the management of retirement annuity investments has traditionally been poor, with many funds underperforming against market returns. According to SPIVA, as of 30 June 2024, 67% of funds have underperformed the S&P South Africa DSW Capped Index over the past decade. That’s more than two thirds of all the funds available to investors. At 10X, we help investors compare their returns to the market to see if you are having investment management problems and to discuss whether 10X can improve your situation.

Incorrect asset allocation

If you are investing in a retirement annuity, you most likely have a long term investment horizon. Many investors tend to invest too conservatively into shorter term defensive assets such as cash and bonds. While that allows for less risk and volatility than equities, for example, the potential returns are lower, too. If you misallocate, you could receive lower returns. If you correctly match your asset allocation with your investment horizon you are more likely to receive the highest potential return over that period. Have a look at the different funds available through 10X to see how we think about asset allocation.

Got more questions about retirement annuities? Check out our Retirement Annuity FAQ page to get all the answers you need.

High Fees

There are many companies that charge more than 3% per annum for a retirement annuity. While 3% doesn’t sound like a lot, the negative compounding effect is monstrous, and can reduce the money available to you in retirement by up to 30% over 20 years. The worst part is that there are many investors who don’t even know that they are paying 3% or higher.

You can easily find out what your total fee is by asking your investment provider for your EAC (Effective Annual Cost). If you are paying 3% and looking to minimise your fees to maximise your returns, there are investment companies that charge less than 1% p.a. You can try our EAC calculator to easily see if you can make any savings on fees.

Want to know more about the impact of fees on your investments? Read Costs can kill your retirement or get in touch with Michael.

Not understanding Total Return

The mistake investors tend to make is only looking at investment returns, and forgetting to add the guaranteed tax return you get when contributing towards a retirement annuity. For example, if your investment return for a retirement annuity is a measly 1% because of the 3 reasons above, you may think the RA is not worth your while. Yet, if you earn R1m and contribute R100 000 towards a retirement annuity, you will receive R41 000 (41%) tax return.

This results in a total return of 42% of which 41% was guaranteed by SARS irrespective of how the investment performed. Imagine what your total return could be if you improved the way it is managed, invested with the correct asset allocation and reduced your fees?! If you want to know more, you are more than welcome to chat to 10X. We are here to help.