Retiring With Control And Flexibility: Living Annuities In A Nutshell

A living annuity is a retirement savings investment product that offers you the flexibility to draw a regular income after retirement while keeping your remaining capital invested. Unlike a life (guaranteed) annuity, which provides a fixed income for life, a living annuity allows retirees to adjust their income withdrawals and maintain control over their investment choices. The primary concept of living annuities is to invest your funds in various assets, so that you can sustain yourself on the returns generated by these investments rather than depleting your original capital.

Understanding living annuities, and the crucial considerations when deciding to invest, will help you ensure you don’t run out of money in your retirement. These considerations include your effective annual cost and the impact of fees, strategies for beating inflation, asset allocation, offshore exposure, and drawdown rates. With a firm grasp of these concepts, you can make informed decisions for your retirement savings, and 10X Investments is here to give you the facts. Our goal is to ensure that you can grow your wealth and retire with confidence. 

Keep reading as we answer a few critical questions regarding living annuities, and check out our recent webinar for more information. 

How Do Fees Impact My Investment?

Fees can have a significant impact on the growth of your investment if they’re low, or they can corrode it if they’re not. High fees can substantially reduce your investment returns over the long term. This reduction occurs because high fees compound over time, diminishing your overall returns and eroding your capital. On the other hand, low fees contribute to the growth of your investment by allowing more returns to be reinvested, allowing compounding to work for you, not against you. 

To demonstrate: Consider an investment of R1,000,000 with an annual return of 7%. If total fees are 3%, the investment grows to only R4,321,940 over 30 years. However, if fees are 1%, the investment grows to R7,612,260. This example shows how even a small difference in fees can have a significant impact on your long-term investment growth. 

Essentially, low fees (combined with sustainable drawdowns) can extend the lifespan of your retirement savings, providing a reliable income throughout your retirement – and if low fees are what you need, 10X Investments has your back. Our exceptionally low fees (1.04% which reduces the more you invest, versus the typical 3% or even higher) means more of your money is reinvested and compounded over time, leading to greater returns.

If you’re still not convinced, take a look at this report and our flagship 10X Your Future Fund. With a strong performance history and consistently positive net returns (thanks in part to 10X's low fees), it stands as a prime example of how you can maximise your retirement savings.

We should also clarify the distinction between fund performance and net investment returns. Fund performance refers to the overall returns that the fund generates, which can fluctuate based on market conditions and the effectiveness of the fund's investment strategy. Fees, on the other hand, are the costs associated with managing your investment. These fees do not affect the fund's performance itself but do reduce the amount of return you actually receive as an investor. The return you see after deducting these fees is your net investment return.

Suppose you invest R100,000 in a fund that generates an annual return of 8%. Your investment provider charges a fee of 1%, which amounts to R1,000. The return you actually receive after this fee is deducted (your net return) would be R7,000. It’s crucial to understand that while performance is important, what ultimately matters is the net return. And then, be careful not to disregard the impact of inflation. If inflation averages 3% per year, in our example, the money in your pocket is actually worth R4,000. 

Alternatively, if the fees were higher, say 3% (R3,000), your net return would drop to R5,000, and after accounting for the same inflation rate, your money would be worth just R2,000. In short, low fees are vital because they ensure that you retain more of the returns generated by the fund. When fees are low, your net returns are higher, leading to more substantial growth in your retirement savings over time.

Adding to the above, understanding what fees are charged by different providers and choosing a provider that is upfront about their fees is crucial for maximising your investment growth. Oftentimes, management fees are charged by the fund manager for managing the investment portfolio, performance fees make up additional costs based on the fund’s performance, and hidden costs can include transaction fees, administration fees, and other charges not immediately apparent. All of these costs quickly stack up and compound, so you’ll want to pick a provider where fees are minimised and transparency is maximised. 

For example, 10X Investments offers a straightforward and transparent fee structure designed to keep costs low. We charge a single management fee starting from a maximum of 1.04% per annum, including VAT and trading costs, which decreases as your investment amount increases. Additionally, there’s no need to worry about hidden costs, as we charge no upfront fees, advice fees, exit fees, or penalties for changing your investment strategy – we aim to keep our fee structure simple and predictable. 

By investing with 10X, you can also avoid several common fees associated with other providers, including performance and excessive administration fees, ensuring more of your money works for you rather than being eroded by hefty hidden costs. 

What Is Effective Annual Cost (EAC)?

Effective Annual Cost (EAC) is a standardised measure introduced by ASISA to help investors compare the cost of owning and accessing an investment (like a living annuity). The EAC represents the total cost of owning an investment product over a year, including all fees and charges like investment management, administration, advice, early termination penalties, loyalty bonuses, and guarantees. When looking at your EAC or comparing providers, you can use EAC to determine the true cost of owning a living annuity and which provider offers better value for money. 

You can compare the EAC percentages of various providers to understand the cost implications on your annuity. A lower EAC typically means more of your investment is working for you, whereas providers with higher EACs may deliver lower net returns as their fees compound over time. As mentioned, lower costs can significantly enhance your investment returns, so you want to pick a provider with fair, transparent and low fees. 

Here at 10X Investments, we strive to provide simple retirement solutions with one all-in fee, with an emphasis on transparency regarding your total cost of investment. In addition to transaction costs which every portfolio incurs, we charge a single, all-inclusive fee covering investment management and administration. We keep things simple and consistent, with no penalties for early exit and no costs for loyalty bonuses or guarantees. With a 10X Living Annuity, all additional costs that you would have paid to other providers are instead invested on your behalf. 

Should you decide to pay a financial advisor to invest with us, your specific EAC would be higher. While you can go this route if it suits you, the 10X solution is designed to do away with the need to ask or pay for advice in order to select a fund. To find out what you can expect to pay with 10X Investments, simply take a look at our EAC calculator. 

Beating Inflation With A Living Annuity

Plenty of investors have realised the incredible benefits of living annuities when it comes to outpacing inflation. Unlike life (guaranteed) annuities, living annuities tend to offer more flexibility and stand as a typically inflation-resistant alternative for retirement. 

One of the most notable risks of a life (guaranteed) annuity is its vulnerability to inflation (and the guaranteed rate increasing directly after you sign!). With a life (guaranteed) annuity you can expect a fixed payment amount regardless of market conditions, however, without adjustments, inflation can significantly erode the purchasing power of your investment over time. Even if you opt for a life (guaranteed) annuity that increases at the nominal rate of inflation, you still might find buying power eroded by increasing prices across the board. In short, the fixed terms offered by life (guaranteed) annuities don’t adapt to changing economic conditions, which can potentially spell disaster for you, post-retirement.

On the other hand, living annuities offer plenty of flexibility, allowing you to regularly review and adjust your income drawdown rate to help with managing a constantly-moving inflation rate. Ideally, your income drawdown + the inflation rate + fees must be equal to or less than your investment returns in order to avoid depleting your savings. This is known as the golden equation and you can read more about it here.

With a living annuity, you also have the freedom to choose your underlying investment portfolio, and diversify across various asset classes, including property, stocks, and even offshore investments. For example, if you are more risk-tolerant, you could consider having a portfolio weighted more heavily towards equities. If you would prefer to be more conservative, you could consider bonds. You could also invest up to 100% offshore to hedge your risk if the majority of your other assets were Rand-denominated. All of these are options afforded to you with a living annuity. 

Diversification across different asset classes can help you capitalise on different economic sectors, contributing to the superior performance of your living annuity and generating returns that outpace inflation. Equities (owning shares in various companies or buying into an index that tracks the performance of a selected group of companies, such as the S&P 500 or the Nasdaq Top 100) for example, have outpaced inflation by an average of around 7% per year over the long term, providing a decent buffer against inflationary pressures. 

However, in the case of a major macroeconomic event negatively affecting equity markets (e.g. the Covid-19 pandemic), having exposure to more conservative assets like bonds and cash ensures a measure of safety for your investments. Offshore investments, meanwhile, offer you a way to mitigate some of the country-specific risks of South Africa, such as a potentially fast-weakening Rand.      

What Is An Appropriate Asset Allocation In My Living Annuity?

Asset allocation in your living annuity determines the mix of different investment types within your portfolio. This allocation can impact the balance between stability and growth potential in your living annuity portfolio, and can be customised according to your risk tolerance and financial goals. 

Asset allocation is a critical factor in managing a living annuity. While choosing specific stocks like Microsoft or NVIDIA and betting big at the right time produces stories of quick riches (those stocks can certainly be a part of your portfolio), it’s the blend of various asset classes – bonds, cash, equities, and offshore investments – that plays a pivotal role in the overall performance of your annuity over longer time frames. Proper asset allocation is essential to grow your funds, outpace inflation, and maintain diversification to mitigate risk.

In general, equities offer higher growth potential but come with higher risk. Bonds provide more stability and lower risk, but generally offer lower returns, and cash investments are often the safest but typically yield the lowest returns. 

As discussed in our webinar, retirees often make the mistake of becoming too conservative too early in their investment approach. While this can seem like the safest bet, it’s recommended to rather balance your portfolio according to your time horizon and risk tolerance. For shorter time horizons, defensive assets like bonds and cash may be appropriate. However, living annuities are typically long-term investments, with time horizons of 20, 30, or even 40 years. Over such extended periods, equities have historically outperformed inflation and should be a significant part of your portfolio. Whatever your inclinations, it’s always a good idea to speak to a professional before making any investment decisions.  

Careful assessment of your situation and appropriate asset allocation can ensure that your portfolio withstands market fluctuations and provides a stable income throughout your retirement. A strategic blend of assets ensures that you can meet your income needs while protecting against the eroding effects of inflation.

Diversified Asset Allocation: 10X Underlying Funds

Diversified asset allocation strategies spread investments across different asset classes and geographical regions to reduce risk. For example, 10X Investments offers various funds with different asset allocations to cater to different risk appetites and investment horizons:

The 10X Your Future Fund provides diversified exposure to a range of asset classes, including stocks, bonds, and property – both locally and internationally. This fund is tailored for investors seeking long-term capital growth with a balanced approach to risk. Suitable for a variety of investor profiles, it aims to deliver returns that outpace inflation while managing volatility through diversification. This flagship fund is a great choice for those looking to secure their financial future with a well-rounded investment strategy.

The 10X International High Equity Fund is heavily invested in growth assets, primarily international equities, with a small portion in defensive assets like bonds and cash. This fund is ideal for investors with a higher risk tolerance aiming for significant capital growth over the long term (7 years and longer). With an annualised return of 13.7% since inception, it suits those who are willing to endure higher volatility for potential long-term gains​.

The 10X Defensive Fund features a higher allocation to defensive assets including bonds and cash compared to growth assets like shares and property. This fund offers cost-effective exposure to a range of local and international asset classes and is suitable for investors seeking a steady level of income along with capital growth at low volatility over the medium term. Recommended for a time horizon of 1-3 years or longer, the fund has an annualised return of 9% since inception​.

The 10X Medium Equity Fund offers a balanced mix of equities and bonds, with moderate exposure to growth assets while maintaining some defensive assets too. This fund is suitable for investors looking for a balanced approach with moderate capital growth and income over the medium to long term (5 years and longer). It has an annualised return of 11.3% since inception and is designed for those looking for a middle ground between high growth and stability​.

The 10X Money Market Fund invests in a balanced and diversified mix of short-term interest-bearing money market instruments and short-term bonds. This fund is suitable for investors seeking income and capital preservation with low risk, making it ideal for those with a short-term investment horizon of one month or longer. With an annualised return since inception of 6.6%, this fund is designed for conservative investors who prioritise stability over high returns​​.

These are just a few of our funds that cater to different financial goals and risk appetites, offering you the flexibility to choose a fund that aligns with your risk tolerance and investment objectives.

What Are The Benefits Of Offshore Exposure In My Living Annuity?

Investing offshore within a living annuity offers the potential for broader investment opportunities and diversification from country-specific risks. Unlike other retirement funds governed by Regulation 28 of the Pension Funds Act, living annuities are not restricted to a 45% offshore allocation, allowing you to allocate up to 100% of your assets offshore.

There are two main reasons why you might want to invest offshore:

To Access Broader Investment Opportunities: Some investors choose to look offshore to access investment opportunities in some of the fastest-growing countries in the world. Investing offshore means access to various sectors, industries, and companies that make up the titans of global industry – opportunities that are not available in South Africa. Take AI, for example, which is scarcely represented on the Johannesburg Stock Exchange (JSE).

For Diversification: Offshore investments are a viable way to diversify away from country-specific risks. Investing offshore can help balance out your portfolio, essentially if you have significant assets tied up in South Africa like property or local businesses. 

Additionally, if you find yourself spending substantial time abroad or have significant expenses in foreign currencies, matching assets to liabilities becomes even more critical. However, deciding just how much to invest offshore calls for careful consideration. Although living annuities allow for up to 100% offshore investment, our data shows the optimal allocation often lies between 40% and 60%. This range typically maximises diversification benefits for Rand-based investors without increasing the risk of depleting funds due to currency fluctuations and market volatility.

Key factors to consider include the proportion of expenses in Rand versus foreign currencies and your own ability to endure currency exchange rate fluctuations. The Rand's volatility can significantly impact returns, either amplifying gains when the Rand depreciates or magnifying losses when it strengthens. Because of this, you’ll want to match your offshore investment proportion with your expected expenses in foreign currencies while still maintaining a stable income flow.

In our webinar, our Solutions Strategist Kelin Pottier suggests that diversifying up to around 40-60% offshore can increase your probability of sustaining a living annuity without running out of funds. Beyond this range, the volatility of the Rand can begin to outweigh the diversification benefits, particularly if you have set higher drawdown rates.

While offshore investments can enhance growth and diversification in your living annuities, the allocation should be balanced to manage currency risks and align with your specific financial situation and spending patterns. You also can’t solely rely on past performance to guarantee future performance – it’s a little more complex than that. You’ll want to pay careful attention to your asset allocation and determine the right onshore and offshore exposure for your specific time horizon and investment objectives. You can read more about investing offshore here. 

How Do I Set My Living Annuity Drawdown Rate?

With a living annuity, your income is adjustable. Adjusting the drawdown in a living annuity offers significant flexibility in managing your retirement income. If your financial needs increase one year, you can raise your drawdown rate to withdraw more income, and if your needs decrease the following year, you can lower the drawdown rate to match. You can adjust your drawdown rate annually and choose how often you receive your income, be it monthly, quarterly, semi-annually, or annually. Keep in mind that these decisions must be made before your policy anniversary date.

Note: ‘Drawdown rate’ in the context of living annuities refers to the percentage of the total value of funds in your annuity that is withdrawn to provide you with an income. 

Legal requirements in South Africa stipulate that the minimum drawdown rate is 2.5%, and the maximum is 17.5%. In general, maintaining a lower drawdown rate can enhance the sustainability of your annuity funds over time, as you are less likely to deplete the money in your annuity when you withdraw a smaller percentage as income (as mentioned, your drawdowns + inflation + fees should not be more than the return on your investments so that you don’t eat into the original investment capital). A sustainable drawdown rate typically falls between 4% and 5%. Exceeding a 6% drawdown rate can strain the long-term viability of the fund.

You may find that even withdrawing the minimum of 2.5% can mean more income than you really need at a particular time. If this is the case for you, you could go the money-savvy route and consider reinvesting the excess funds into a retirement annuity. You can later transfer these funds back into your current living annuity or open a new one at your convenience.

Typically, two-thirds of retirement funds must be used to purchase an annuity, while the remaining portion can be taken as cash, including a tax-free component. Another effective strategy includes using the tax-free portion available upon retirement as your initial income, which can reduce financial pressure in the early years of your retirement journey. By taking this tax-free lump sum, you can lower your drawdown rate, ensuring that your annuity remains sustainable while still gaining the necessary income for the first few years.

This lump sum can act as a buffer, allowing you to preserve your annuity funds' sustainability. Given the ever-increasing life expectancy, potentially extending to 100 years, managing drawdown rates effectively is essential for ensuring financial stability throughout retirement. Maintaining a sustainable drawdown rate, making the most of tax-free portions, and planning for long-term needs are all key strategies for preserving the longevity of your annuity funds.

Leaving My Living Annuity To Beneficiaries

Another key difference between a living annuity and a life (guaranteed) annuity from an estate-planning perspective is that capital used to purchase a life (guaranteed) annuity becomes the property of the insurer when you pass away, whereas a living annuity allows any remaining capital to be bequeathed to your nominated beneficiaries. 

These legacy benefits are a very prominent feature of living annuities, particularly for those who have saved diligently throughout their careers. If your spouse inherits your living annuity upon your death, they can continue to draw an income from it. Upon their passing, any remaining capital can be passed on to the next nominated beneficiary. 

Additionally, proceeds from a living annuity are not subject to estate duty upon your death, making it an effective estate-planning tool. As long as there is capital left in your living annuity, it can continue to benefit successive generations. 

Tailored Retirement Solutions: Adjusting Your Strategy Down The Line

A significant advantage of a living annuity is its flexibility, including the option to transfer from a living annuity to a life (guaranteed) annuity later. This flexibility is important because it allows you to adapt your retirement strategy as your needs change. On the other hand, starting with a life (guaranteed) annuity means you cannot switch to a living annuity later, so you’ll want to think carefully about your investment choices before taking the leap. 

You can also have multiple living annuities, each with different drawdown rates and asset allocations. This approach enhances flexibility and allows you to stagger transitions to life (guaranteed) annuities over time. 

If you’re thinking of switching from a riskier asset allocation to a lower-risk one later, you can do that too. Within a living annuity, you can change the underlying funds, moving between aggressive and conservative investments as needed. This flexibility allows you to adjust your strategy based on market conditions while keeping a long-term perspective.

Adding to the above, regular reviews of your investment strategy are essential. Life circumstances and market conditions change, and it's crucial to ensure your allocation aligns with your retirement goals. These reviews could be annual, focusing on whether your initial investment plan still meets your objectives.

Regarding partial switches, you can't directly transfer part of a single living annuity to a life (guaranteed) annuity, but you can split your living annuity into multiple accounts. Once split, you can transfer one or more of these living annuities to life (guaranteed) annuities. This method offers a way to gradually shift some of your investments into guaranteed income streams without an all-or-nothing approach.

Secure Financial Longevity With 10X Investments

10X Investments' living annuities are designed to provide sustainable, inflation-beating returns through strategic principles and effective management. With our low fees and no hidden costs, we help you minimise the erosion of your long-term gains, meaning more of your money is working for you. We prioritise tailored asset allocation and diversification, and our underlying funds are structured to match various goals and time horizons, balancing income needs with growth to counteract inflation. 

With a focus on long-term growth, we structure our funds to weather short-term volatility and leverage the market’s overall trajectory to your advantage. Our ultimate goal is to deliver returns that outpace inflation and set you up for a comfortable, secure retirement. 

We encourage you to leverage our professional expertise to make informed decisions about your retirement savings and get in contact if you have any other questions. There are no call centres here at 10X Investments, only helpful humans ready and waiting to set you up for a secure retirement.