To making your savings last in retirement - The South African's guide This guide includes links to short videos and other powerful tools
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The South African’s guide to making your savings last in retirement This guide includes links to short videos and other powerful tools
Table of contents
–
Introduction P4
Chapter 1 | Taking stock: what you have and what you need P5
Chapter 2 | Bridging the gap: possible corrective action P6
Chapter 3 | How long does your money have to last? P7
Chapter 4 | Different retirement funds, different access rules P8
Chapter 5 | Cash or annuity: potential tax consequences P10
Chapter 6 | Annuity options: turning your savings into an income P12
Chapter 7 | Choose a prudent drawdown rate P15
Chapter 8 | Keep your fees low P16
Chapter 9 | Invest for growth P17
2 / 10X.CO.ZATable of contents
–
Chapter 10 | Getting the optimum from your living annuity P18
Chapter 11 | Managing your emotions P19
Chapter 12 | Managing your asset mix P20
Chapter 13 | The relevance of Regulation 28 in living annuities P21
Chapter 14 | A word on investment styles: active or indexing? P22
Chapter 15 | Which annuity is right for you? P23
Chapter 16 | Switching providers P26
Chapter 17 | The 10X Living Annuity P28
Joining 10X | Interested in joining 10X? P29
Appendix | Glossary of key terms and resources available P30
3 / 10X.CO.ZAINTRODUCTION
As you near retirement, two questions are likely to occupy your thoughts:
What to do with my free time? and What to do with my retirement fund
savings? For a smooth transition into retirement, you must apply your mind
to both.
This e-book will help you answer the second question by explaining your different
options at retirement, together with the associated risks and benefits.
Moving into the dissaving phase in life – spending more than you earn – is a big
change. There is an instinctive fear of consuming capital and the prospect of a
diminishing lifestyle in later years. The good news is that these fears can be allayed
by making well-informed decisions. This document will help you, by addressing
questions such as:
• What are my options?
• How much of my savings should I take as cash?
• What type of annuity (if any) should I purchase with the balance?
• How much income can I safely draw from my savings?
• What is the optimal way to invest my savings post-retirement?
• What can I do to improve my situation?
Choosing the appropriate retirement product is probably the most important,
and most complex financial decision you will make in your life. Your decision
(which, in some cases, is irreversible) has income, tax, estate planning and lifestyle
implications.
For further help, please consult an appropriate retirement planning tool (such as
the 10X Retirement Income Calculator) and, if you are not sure, a financial advisor.
Only obtain advice from a reputable financial organisation and separate the advice
fee from the investment product you choose.
Unlike your discretionary savings, the money in your retirement fund(s) is subject to
access rules that are set out in the Income Tax Act. Different rules apply to different
types of retirement funds. They vary depending on whether you withdraw or retire
from your fund.
For more information about the various types of retirement funds and different
access rules please see Chapter 4: Different funds, different access rules
If you are still in the accumulation (saving) stage and are not sure that you are on track
for a decent retirement it would be better to first download 10X’s retirement saving e-book,
which covers the process of saving for retirement.
Please note that this e-book is provided for information purposes only and does not constitute financial advice.
Your optimal decisions ultimately depend on your personal financial needs and circumstances.
4 / 10X.CO.ZACHAPTER 1
Taking stock:
What you have and what you need
Unless there are unexpected changes in your personal circumstances, retirement is not something that hits you out of the
blue. You can see it coming years in advance. Ideally, you planned for this event decades ahead, and followed an appropriate
savings and investment strategy. This will have set you up for a comfortable retirement.
The concept of retirement would have been vague and abstract for most of that time, but in the last stretch of your formal
working life – say the last five years or so – it will start to take on a much clearer shape, and you can make more concrete
plans. Below are some of the matters you should then be thinking about.
How much are you worth, in terms of income? How much income do you need?
You may have a pretty good idea of how much money you For most of your working life, your savings goal was
will have at retirement, based on the projections in your fund expressed as an absolute amount, or in terms of an income
statement. But do you know what that money is worth, in replacement ratio. But now that you are near retirement,
terms of the annual income it will afford you? and you know what your lifestyle costs, you can be more
exact.
Online tools, such as the 10X Retirement Income Calculator
will give you a sense of your sustainable income if you invest This is the time to set out a detailed budget, itemising your
the proceeds in a living annuity. Fill in a few details to various expenses, and how you intend to fund these. This
calculate a sustainable income (known as your drawdown) will help you decide how to apportion your retirement
for your circumstances. savings, between cash and even different types of annuities.
Your primary goal will be to cover your non-negotiable
living expenses such as accommodation, utilities, groceries,
Use the 10X Living Annuity Calculator healthcare, transport, insurance, communication and
entertainment. These are your fixed costs. You will require
See how much income you can draw
each month to last your retirement years. a steady income to cover them.
Looking good! Beyond that, if your goals include travel, recreation and
Your sustainable income until age 85 is R27.5k pm personal development, you need to budget for them also.
and your desired income is R22.9k pm
Show me detailed graphs
These may require periodic outlays: you will need to access
the required funds at short notice, but only at a future date.
Desired R22.9k pm Further, you should plan for emergencies and unexpected
LAST UNTIL AGE 98
costs.
Sustainable R27.5k pm
LAST UNTIL AGE 85 Each of these objectives has a different time horizon,
which should instruct how you apportion and invest your
retirement savings. You may have to fund your fixed
expenses for decades, which means you should invest this
money with a long-term perspective, ideally using an
Pre-tax Monthly Income R22.9k pm
annuity. Emergencies happen unexpectedly, so you need
ready access to this money, and you won’t want to expose
Adjust Outcome Continue
this money to short-term return fluctuations.
To compare these results with the income you would receive
from a guaranteed annuity, you need to contact the large
life assurance companies and obtain quotes. Be aware that Watch the video
different types of annuities pay different incomes (initially Which portfolio is best
and over time), and different companies quote different in a Living Annuity?
rates. We discuss this in more detail in the ‘Guaranteed
Annuity’ section.
5 / 10X.CO.ZACHAPTER 2
Bridging the gap:
Possible corrective action
Don’t despair if your projected retirement income does not match your expenditure goals. If you have a few years to go,
there are still things you can do to improve your outcome. This includes saving more aggressively, or delaying your
retirement. The 10X Retirement Calculator can help project your retirement outcome (income replacement ratio) using
your retirement age, contribution rate or desired income.
In retirement, there are also ways to stretch your savings, by taking on part-time work, and by using a low-cost rather
than a high-cost living annuity, or investing in a growth rather than a defensive portfolio.
But you also need to be realistic, and accept that within your timeframe, you can only improve your prospects so much.
You cannot make up for decades of under-saving, so you may have to scale back your expectations.
Revisit your budget and see where you can cut back. Perhaps you can come out with just a few minor lifestyle adjustments,
such as a more affordable car, but it may also require a more drastic change, such as trading down on your living
arrangements.
The sooner you become aware of your shortfall, and start making those lifestyle changes, the more you can add to your
savings, and the less painful the adjustment will be.
Your pre-retirement investment strategy one year to the next fluctuates.
If you ‘retire’ (rather than “withdraw’) from any type of
retirement fund, you must use at least two-thirds of your If you are currently invested in a life stage portfolio in your
proceeds to purchase an annuity. (Fund balances less than retirement fund, with an automatic glide path, then you
R247,500 and “vested benefits” are excluded from this should inform your fund administrator that you wish to opt
requirement.) You always have the option to annuitise your out of this glide path.
entire fund balance, however.
Alternatively, if you plan to cash out your savings or buy a
This is not a decision you should defer until you retire, guaranteed annuity, your investment horizon is set by your
because your preferred post-retirement product will inform retirement date. Your primary goal then is to preserve what
how you should invest your savings until then. you have saved to date.
If you decide on a living annuity, your money remains You cannot afford to be over-exposed to the stock market,
invested when you retire. You should, therefore, align your because your portfolio may not have enough time to recover
pre-retirement portfolio (essentially high, medium or low in the event of a crash or correction. You would be forced
equity) to your expected portfolio post-retirement. Your to lock in this loss at retirement and make do with a lower
investment time horizon is then not determined by your income throughout your retirement.
retirement date, but by your life expectancy.
You should therefore consider a de-risking strategy that
Effectively, you remain a long-term investor, so consider gradually lowers your exposure to the share market over
following a high equity strategy initially. In the long run this period. A life-stage portfolio approach will do this for
(5 years or more), a high equity portfolio is likely to you automatically, to preserve your accumulated savings
generate the highest return, even if the return from as you approach retirement.
6 / 10X.CO.ZACHAPTER 3
How long does your money have to last?
This is the big unknown that makes post-retirement financial planning difficult. It is about finding an optimal solution that
balances the risk of outliving your savings against the risk of unnecessarily sacrificing your lifestyle. This balancing act
becomes harder if your savings must also provide for a partner.
A life expectancy table can take you only so far; in fact, you have a more than a 50% chance of living longer than the table
suggests. (This is because the distribution of ages when people are expected to die is not a normal but a skewed distribution
– more people live longer than die early.) Your health, and the longevity of your parents and grandparents may be a better
guide to set your own expectations.
7 / 10X.CO.ZACHAPTER 4
Different retirement funds,
different access rules
There are five types of retirement funds. Pension and provident funds are group schemes, usually sponsored by your
employer. Preservation funds (either pension or provident) and retirement annuity funds (RAs) are designed for individuals.
Historically, pension and provident funds were subject to different tax rules and annuitisation requirements, but with the
passing of National Treasury’s retirement reforms, these have now been largely standardised.
In the past, employees who reached the retirement age specified in their employer’s retirement fund rules were required
to ‘retire’ from the fund. This law has been changed, and it is now possible to preserve your benefits, either within your
employer’s fund, or by transferring to a preservation or RA fund. Retiring from your employer does not require you to retire
from your preservation or RA fund. There are no age restrictions on these funds.
Pension funds Provident funds
The objective of a pension fund is to provide employees with The original objective of provident funds was to provide
a regular income in retirement. This income is referred to as employees with a lump sum at retirement. With effect
annuity income. from 1 March 2021 these funds are subject to the same
annuitisation requirements as pension funds.
Once you have reached the retirement date set in the rules
of your pension fund, you are required by law to use at least However, provident fund members with a “vested benefit”
two-thirds of the proceeds to purchase an annuity. Only if can still opt to take this portion entirely as a cash lump at
the fund value is less than R247,500 may the full amount be retirement. The “vested benefit” refers to their opening
taken as cash. balance at 1 March 2021, and all subsequent investment
returns thereon. Contributions made after 1 March 2021
Lump sums are subject to the retirement and withdrawal (and returns thereon) fall under the new, standardised
lump sum tax table (Figure 1). (pension fund) rules.
Provident fund members who were 55 or older on 1 March
At retirement Early withdrawal Tax rate
2021 can still take their entire benefit as a lump sum at
R0 – R500,000 R0 – R25,500 0%
retirement, except for contributions (and returns thereon)
R500,001 – R700,000 R25,001 – R660,000 18%
made to a new employer’s provident fund thereafter.
R700,001 – R1,050,000 R660,000 – R990,000 27%
+R1,050,000 +R990,000 36%
Figure 1: Retirement and withdrawal lump sum tax table
*Source SARS
You do, however, have the option to cash in your pension
fund before reaching the fund’s retirement age, when
you leave your employer (on resignation, retrenchment,
dismissal or work retirement).
We strongly advise against this during the accumulation
phase, but if you retire before reaching your fund’s set
retirement date, you can still ‘withdraw’ from the fund and
take the entire amount as cash.
Such withdrawals are taxed per the withdrawal lump sum
tax table shown in Figure 1. You will notice that withdrawing
incurs a higher tax charge than retiring,
to dissuade you from cashing out early.
8 / 10X.CO.ZAPreservation funds taken advantage of your one withdrawal, then you can still
These funds enable your retirement savings to remain ‘withdraw’ before age 65, and claim the full amount as cash
invested if you resign from your employer, or you are (net of lump sum tax).
dismissed or retrenched, or you retire.
Retirement annuity fund
Transfers to a preservation fund are tax free. They provide This is a pension fund for individuals. The same lump sum
a degree of flexibility because you are allowed one partial or tax tables and annuitisation requirements apply as for a
full withdrawal (for each transfer) before you retire. corporate pension fund, with one big difference: you cannot
withdraw from an RA fund, you can only retire (from age
If you ‘retire’ from the preservation fund, the same 55 onward).
annuitisation rules apply for pension and provident
preservation funds as for pension and provident funds, There are exceptions to this rule relating to emigration,
divorce and early retirement due to ill-health, but otherwise
respectively.
you will be required to use at least two-thirds of your fund
balance to buy an annuity, if the fund balance exceeds
Important caveat: if you have made a partial withdrawal
R247,500.
from your pension preservation fund before retirement, you
can no longer avoid the annuitisation requirement on the Note, however, that the R247,500 cap applies per fund.
balance (unless this is less than R247,500). If you own two policies in the same RA fund, these will be
aggregated, to decide whether you need to annuitise or not.
The earliest retirement age is 55, but if the fund rules If they relate to two different RA funds, they will not
stipulate a retirement age of, say, 65, and you have not be aggregated.
A word on lump sum tax tables
The tax payable on a lump sum benefit takes account of any previous lump sum you received.
In case of a ‘retirement’ benefit, Sars considers all lump sum benefits received since 1 October 2007, and in case of a
‘withdrawal’ benefit, all lump sum benefits received since 1 March 2009.
What this means in practice is that if you receive two ‘retirement’ lump sums of R500,000 each (say, one from a pension fund
and one from an RA fund), only one of these lump sums is not taxed. The other R500,000 is taxed as though you had received
R1m from just one fund (i.e. the tax table is applied from R500,000 onward).
In the same vein, if you received a R500,000 lump sum on withdrawing from your employer’s provident fund in, say, 2010,
you no longer qualify for the tax-free lump sum on claiming your RA thereafter.
Note that if your retrenchment package was taxed as a lump sum by Sars, this too will be considered in determining the tax
payable on subsequent lump sum benefits.
9 / 10X.CO.ZACHAPTER 5
Cash or annuity:
potential tax consequences
You should know that taking your entire benefit as a cash lump sum is highly tax inefficient, beyond the R500,000 tax-free
portion. You pay lump sum tax on the balance, and then you are liable for tax on the investment income you earn from this
money thereafter.
If you choose an annuity, the transfer to the annuity is tax-free. If you choose a living annuity, the earned investment income
is also tax-free. You pay income tax only on the income you receive from your annuity.
Let’s look at a practical example (using the prevailing lump sum and 2019/2020 income tax tables).
Say your provident fund is worth R5m at age 65. If you take the cash, you pay upfront lump-sum tax of R1,552m. You then
pay income tax on the interest you earn, and dividend tax on your share investments. Assuming a 50/50 split, this will be
roughly R11,000 pa (assuming a 7% interest yield and a 3% dividend yield).
If you instead take R500,000 tax-free and buy an annuity with the balance, drawing income at 6% pa (R270,000), you will pay
annual income tax of around R33,000. It will clearly take many decades before the higher income tax negates the upfront
lump sum tax, much longer than you will live.
If your retirement fund is worth less than R2,5m, then chances are very good that you will pay NO INCOME TAX on your
annuity income (assuming you take the R500,000 tax-free portion and receive a 6% yield on your R2m annuity, and you earn
no other income). Had you cashed out though, you would pay R652,500 in lump-sum tax.
The bottom line is that for most people, taking the cash is a very expensive luxury.
10 / 10X.CO.ZATaking the cash anyway
As explained, those with fund balances less than R247,500, As with any investment, you need to consider your time
or who withdraw before reaching their fund’s retirement horizon. If you anticipate some big near-term expenses
age, or who have “vested benefits”, have the option to take (such as travel or home renovations) then it makes sense
these amounts (or a portion thereof) as a cash lump sum. to keep some of this money in a savings account. However,
if you also plan to draw a regular income from your savings
Any cash lump sum will reduce the amount available over 10 or 20 years, you need to invest the balance with a
to purchase an annuity, and you will accordingly receive long-term perspective, with an eye to achieving inflation-
a lower monthly income for the rest of your life. beating growth.
If you still qualify for a tax-free lump sum, it makes sense This requires you to put some money in the share market.
to take advantage of this tax saving. Ideally, you would set Historically, this has generated the highest return over time,
this money aside as your emergency cash reserve. and doing so will most likely sustain your required income
for longer.
If you lack the discipline or financial acumen to deal
prudently with your lump sum, you should consider The simplest way to do this is by investing your money
taking no more than that. Apart from the tax inefficiency, in a low-cost, balanced (multi-asset) unit trust fund. This
remember that the intended purpose of your retirement type of vehicle facilitates monthly withdrawals, giving you
fund is to provide you with adequate income throughout the benefit of both a low-cost growth portfolio and a
your retirement years. It is not to pay off debt, buy a car, regular income.
start a business, or finance a holiday.
Still, there are valid grounds to avoid an annuity, for
example if you plan to emigrate. Transferring your
retirement fund proceeds to an annuity – be it a guaranteed
or a living annuity – will lock up your capital in South Africa.
You would have to keep receiving income in rand, pay tax
locally, and the onus would be on you to convert the net
proceeds into foreign currency (with the associated cost
and exchange rate risk).
Other factors (such as your health) may also warrant you
taking all your money upfront.
Investing the cash
Receiving a large amount of cash presents you with the
same problem as if you had invested in a living annuity:
how do you manage this money so that it works optimally
for you?
You may think that the safest and simplest bet is to put
your money into a savings account and live off the interest.
But the interest only compensates you for inflation, so the
purchasing power of that interest income (and your capital)
will decline steadily. It will also not deliver a consistent
income, as interest rates change.
11 / 10X.CO.ZACHAPTER 6
Annuity options:
turning your savings into an income
Retirement usually means saying goodbye to your pay cheque and living off your savings. This is a bit like replacing a
perennial stream with a dam of water. Many people, even the well-off, struggle with this adjustment, drawing from a finite
stock rather than a perpetual flow.
But there is a way to turn your stock into a flow. That is what annuities do: they convert your savings into income. You can
choose between a living or guaranteed (life) annuity. In making your decision, you need to consider your goals.
As your primary goal, you will probably want to secure a retirement income that:
1. Enables you to maintain your customary, or at least an acceptable, standard of living
2. Lasts throughout your retirement years (and, if applicable, your spouse’s)
3. Grows annually with inflation, to keep pace with the cost of living
You may also have secondary goals, such as leaving an estate or retaining some flexibility over your financial affairs.
These, too, will determine the post-retirement product most appropriate for you.
Guaranteed annuity
A guaranteed annuity (also known as an underwritten, traditional or life annuity) is an insurance product that pays you
a specified monthly pension for life. You purchase this annuity from a life assurance company. The insurer assumes the
longevity risk (the risk that you live longer than expected) as well as the investment risk (earning insufficient return on
your capital to pay your pension).
The full pension is paid until you die. The drawback is that your capital dies with you, and no money passes to your heirs.
That is your risk: you (or rather your heirs) forfeit your savings, even if you pass much sooner than expected (unless
a guarantee or life assurance is built into the contract).
The monthly income your proceeds will afford you depends on your specific circumstances. Life assurance companies
consider numerous factors:
1. Your age: the younger you are, the longer you are likely to live, and hence the lower your monthly payout.
2. Your gender: women have a higher life expectancy than men, on average, and therefore receive a lower pension.
3. Interest rates: the higher the prevailing interest rates, the higher your monthly pension is likely to be.
4. Your choice of annuity: You have numerous product options, with different risk profiles. In general, the more insurance
you demand, the lower your annuity is likely to be.
12 / 10X.CO.ZATypes of guaranteed annuities
With-profit annuity.
Level or fixed annuity. This is an escalating pension, guaranteed for life. However,
You receive the same amount every month for the rest of the rate of increase is not guaranteed and depends on the
your life. This means that your income does not grow with net (after cost) investment performance of your investment.
inflation; the purchasing power of your annuity (and hence Increases are declared as bonuses and once declared,
your standard of living) will thus gradually decline. become permanent (ie part of your guaranteed pension).
Pension increases are subject to smoothing, i.e. the life
Escalating, variable or inflation-linked annuity. assurance company holds back some of the profit made
This annuity increases annually, either by a fixed amount, in high-return years, to soften the blow of low-return years
or in line with a pre-determined inflation index, such as
the Consumer Price Index (CPI). An escalating annuity will Enhanced annuity.
pay out less than a level annuity initially but will maintain In exceptional circumstances, you may qualify for an
its purchasing power and thus gradually overtake the fixed enhanced annuity if you can demonstrate that your life
annuity in value. expectancy is below average due to your ill-health or poor
lifestyle choices (for example, if you were a heavy smoker
Guaranteed and then for life annuity all your life).
This annuity will pay out less than the first two, as it offers
some protection against your capital dying with you. The Annuity rates (the pension that you receive) are variable
annuity (fixed or variable) is guaranteed for a set number and can differ from one life assurance company to the next.
of years (typically between 10 and 20); should you die within As you may receive a different income for the same amount
the guarantee period your heirs will continue to receive your invested, you should shop around for the best available rate
pension for the remainder of the guarantee period. If you at the time.
do not die within the guarantee period, you will continue
to receive your pension until your death, but your heirs
no longer benefit thereafter.
Capital-back guaranteed annuity.
This combines an annuity (fixed or variable) with a life policy.
Your annuity is reduced by a premium, which pays for a life
?
assurance policy, to the benefit of your heirs.
Joint and survivorship annuity.
This annuity ensures that your spouse will have an annuity
(fixed or variable) after your death. You select the income
level the surviving spouse will receive (typically 75%).
This type of annuity pays out less than a single person
annuity, as the longevity risk increases for the life
assurance company.
13 / 10X.CO.ZALiving annuity
A living annuity is an investment product. You remain leaves them in control of their money. But it comes with risk
invested in the markets after retirement and retain and responsibility, the risk of outliving your savings (because
some control over your savings. It is more flexible than of poor returns, excessive withdrawals, or longevity) and the
a guaranteed annuity, allowing you to: responsibility to manage your savings in such a way that this
does not happen.
1. Choose the assets you want to hold.
2. Choose the income you wish to draw every year With life expectancies gradually increasing, many more
(within limits). people can now expect to live at least a couple of decades
3. Leave an inheritance (the remainder of your capital) after retirement. Managing your longevity risk is therefore
for your nominated beneficiaries when you pass away. paramount. There are three main levers that will help you
4. Switch at a later stage. mitigate this risk:
As many as 80% of South African retirees choose a living 1. Your drawdown rate.
annuity rather than a guaranteed annuity simply because it 2. The fees you pay.
3. Your choice of portfolio.
GOAL REACHED!
14 / 10X.CO.ZACHAPTER 7
Choose a prudent drawdown rate
You are required by the Income Tax Act to draw at least 2.5%, but no more than 17.5%, of the value of the residual capital
at policy anniversary date every year.
Obviously, the more you draw, the sooner you’ll run out. If you are drawing down at 10% pa, you will deplete your savings
quite quickly. Ideally, to make your money last, you should draw no more than 4% or 5% each year (including the fee
component).
The conventional approach is to set your desired income upfront, and to then increase your rand payout with inflation every
year.
The risk is that your drawdown eventually hits the 17.5% upper limit, which would cap your income growth. You would then
suffer a drop in lifestyle.
Financial planning tools such as the 10X Retirement Income Calculator can help you find your optimal sustainable drawdown
rate, based on your estimated life expectancy and other parameters. If you are invested in a low-cost living annuity like the
10X Living Annuity and your initial drawdown rate is no more than 4 or 5% of your capital (including fees), your savings
should last for at least 30 years.
But if you initially draw down at 8% pa (growing with inflation thereafter), then, depending on your choice of portfolio,
you risk a drop in lifestyle within 9 to 11 years.
An alternate drawdown strategy is to set a rand income each year, according to how your portfolio has performed. You would
draw more following years of strong returns, and less following periods of low or negative returns. This is ideal if you can call
on non-retirement savings to supplement your annuity income, or you have some scope to cut back on your spending.
Another way to decide on your annual income is to divide your savings by your life expectancy (in years) at each policy
anniversary date, and to draw down accordingly. Life expectancy tables are published online to help you with this. This
conservative approach factors in that your life expectancy increases with age: the longer you live, the longer you are likely
to live. But because the payout depends on the value of your portfolio at the policy anniversary date, it may also subject you
to a more irregular income.
Bottom line:
However much you decide to draw in the coming year, it is important to inform the annuity
provider before your policy anniversary date, or else they will simply re-apply your last
instruction.
15 / 10X.CO.ZACHAPTER 8
Keep your fees low
This is very important: your capital is reduced not only by your drawdown, but also by fees. To assess the full impact on
your capital, you must add your fee rate to your drawdown rate (both are expressed as a percentage of your capital). The
higher your fees, the lower your drawdown rate will need to be, to sustain your savings.
Government estimates the industry average fee for living annuity investors at approximately 2.9% of the investment balance,
made up of 0.75% for advice, 0.25% for administration, 1.5% for investment management and 0.4% for Vat.
You can avoid such high charges with 10X. The 10X Living Annuity does not charge for advice or administration and investors
pay a maximum fee of 0.87% (including Vat). The fee rate reduces even further for amounts above R5m.
That is a potential 2% fee saving per annum. How would that play out for you?
Example:
Say you were drawing down at 8% pa from a R4,8m pension pot. This translates to an initial drawdown of R32,000 per
month. You would receive R20,000 and the service providers would take R12,000. Note that the service providers get
60% of what you get, for very little effort, whereas you had to work years for your share, possibly decades.
Divvying up your savings this way is unjust and unreasonable.
If you can save 2% pa in fees, it would mean that your share of the R32,000 would be R28,000, and the service
providers would get R4,000. The industry’s percentage share of your income drops from 60% to 14% (in other words,
by more than 75%)
This is a quick and simple way to give yourself an immediate 40 percent pay rise in retirement.
Either way, drawing down at 8% pa will deplete your savings
quite quickly. Depending on your choice of portfolio, you are
likely to hit the regulatory drawdown limit of 17,5% pa within
9 to 11 years, and your annual income may no longer keep
pace with inflation. Eleven years is way too early for this to
happen if you retire at age 60 or 65, with a statistical life
expectancy of another 15 or 20 years.
The more prudent option in the above scenario would be ES
FE
to keep your income unchanged at R20,000 pm, and let the
R8,000 pm cost savings compound within your living annuity.
This can add between 5 and 15 years of sustainable income
(depending on your choice of portfolio and future market
returns).
Watch the video
10X Founder Steven Nathan
explains the tyranny of fees
16 / 10X.CO.ZACHAPTER 9
Invest for growth
Your retirement savings may have to last a long time, possibly longer than you envisage. This means you cannot just rely
on the capital you have saved at retirement; you need to supplement this with returns you can earn on your capital.
If you leave your savings in a money market fund, the return will do little more than match inflation. To make your savings
last longer, you need to give your money the chance to earn returns that outpace inflation over time. This means you must
put some money in the share market.
Historically, this has been the most reliable way to maintain wealth over the long term; doing so will most likely afford you
either a higher drawdown rate, or sustain your required income for longer.
How much should you ‘risk’ in the stock market? Despite the many alternative portfolios offered by the investment industry,
your essential choice is between a high, medium or low equity portfolio. In making your choice, you should primarily consider
your time horizon and personal circumstances.
Figure 2: The historical range of returns for high, medium and low equity portfolios*
1-year returns 1900-2018 5-year returns 1900-2018 40-year returns 1900-2018
80%
70%
62%
60%
50%
50%
40%
13%
30%
21% 26%
20%
14%
10% 7% 8%
6%
0%
1% 3% 4%
-10%
-13% -13% -14%
-20%
-30%
-40% -35%
-41% -45%
-50%
Low Medium High Low Medium High Low Medium High
equity equity equity equity equity equity equity equity equity
* In a South African context (with a 25% offshore allocation) | Source: 2019, Morningstar, 10X Investments
Your initial instinct is probably to preserve what you have investor. You still have time on your side and your portfolio
saved, and not to overexpose your money to the vagaries has opportunity to recover from the inevitable market
of the share market. Choosing a low-equity portfolio corrections.
(which holds mainly government bonds and cash) will likely
deliver a steadier return than a high equity portfolio, and Over 5 years and longer, a high equity portfolio has typically
you won’t have to worry about a market crash hammering delivered a better return, with less downside risk, than a
your savings. medium or low equity portfolio, so it makes sense, even
in retirement, to invest your living annuity in a high equity
As a short-term investor, that would be the right thing to do. portfolio.
But if you have just retired, aged between 55 and 65, then
you can expect to live another 15 to 25 years, on average, This could improve your long-term return by up to 2% pa,
possibly much longer. This means you are still a long-term and massively enhance the longevity of your savings.
17 / 10X.CO.ZACHAPTER 10
Getting the optimum from your living annuity
10X research shows that investors drawing down conservatively (ie between 4% and 6% pa) are best served by a high equity
portfolio charging low fees. This is at odds with the conventional approach adopted by many living annuity investors, who
choose a medium equity portfolio at best and pay high fees. This typically diminishes their sustainable income and the
longevity of their savings
In Fig 3 below, we compare the 10X high equity/low fee living annuity to the typical medium equity/high fee approach.
43 Years 31 Years 13 Years 5 Years 3 Years 3 Years 2 Years
Figure 3: The impact of fees over 40 yearss
Added years of sustainable income
Source: 10X Investments; Return
differential of 1,5% pa (6,5% pa v 5% pa);
fee differentail of 2% pa (0,87% pa v 2.9%
pa). Numbers are derived from the 10X
Retirement Income Calculator.
Figures provided are for illustrative
R480k purposes only. Future returns cannot be
guaranteed.
4% pa 5% pa 6% pa 7% pa 8% pa 9% pa 10% pa
One key observation from the above graph is that at high As Fig 3 illustrates, if you draw down at only 4% pa, you
drawdown rates (initial income of 8% pa or higher), the fee could add 43 years of sustainable income by choosing a
and portfolio impact is muted. In other words, your savings high equity over a medium equity portfolio, and by paying
will deplete quickly, and paying lower fees or choosing a 2% less in fees per annum.
higher equity portfolio won’t improve this by very much.
You are unlikely to need an additional 43 years of income;
However, at prudent income levels (4% to 6% pa), the impact more practically, you could instead draw an initial income of
is dramatic. This is because the less you draw as income, 6% pa – that’s 50% more – and still expect to see your money
the more capital you preserve. And the more capital you last an additional 13 years. This option will afford you both a
preserve, the higher the rand return that you keep earning, higher lifestyle and greater peace of mind that your savings
and the slower your capital will diminish. will afford this lifestyle for a decade or so longer.
18 / 10X.CO.ZACHAPTER 11
Managing your emotions
You should not totally ignore your personal risk tolerance, however. There is no point investing for the long-term with a high
equity portfolio if you cannot deal with the discomfort of market volatility, or if you are likely to give in to your emotions.
One way to overcome this is to stick your head in the sand and check on your portfolio balance only sporadically. As Figure 4
below suggests, the less frequently you do this, the more likely you are to see a positive return on your account, and the less
likely your emotions will come into play.
Figure 4: Chance of negative returns over different time periods - SA Equity
Source: 2019, 10X Investments; Datastream; Dimson, Marsh and Staunton. 1 Day to 1 Month 1973-2018, 1 Year to 10 Years 1902-2018
50%
45% 44%
43%
40% 38%
35% 31%
30%
15%
16%
10%
5% 4%
0% 0%
0%
1 Day 1 Week 1 Month 1 Year 3 Years 5 years 7 Years 10 Years
*Please note that past performance is not indicative of future returns
Otherwise, make no mistake, the share market will test your nerve. You need to control your emotions during the inevitable
volatility, or during periods of poor, or even negative, returns. A sudden sharp drop in the value of your portfolio may make
you panic and change your asset mix (or switch into a life annuity) at the worst possible time, i.e. when share prices are low.
Do this, and you will lock in your losses, with the prospect of a permanently lower income thereafter. For optimum benefit
from your high equity portfolio, you need to follow through.
19 / 10X.CO.ZACHAPTER 12
Managing your asset mix
Asset allocation or asset mix refers to the proportion in which your investment portfolio holds the dominant asset classes.
These classes mainly comprise equities (company and property shares, referred to as growth assets) and government bonds
and cash (referred to as defensive assets).
Although there are seemingly an infinite number of different asset mixes, your portfolio will typically fall into one of four
broad categories:
High Equity: around 75% in growth assets
Medium Equity: around 60% in growth assets
Low Equity: around 30% in growth assets
Defensive: around 10% in growth assets
Your investment return depends mainly on your asset mix. In fact, over the long-term, asset allocation (along with fees)
makes up nearly 100% of your total investment return!
Historically, the higher the equity allocation, the higher the long-term average return, as indicated in the graph below.
High Medium Low
Equity Equity Equity Defensive
72% 50% 25% 7%
5%
6% Figure 5: Average long-term returns above CPI (% pa)
Equity
Property Source: 10X Investments; Dimson, Staunton & Marsh,
10%
Bonds & Cash based on back-tested after-inflation returns since 1900.
5%
Figures provided are for illustrative purposes only.
Future returns cannot be guaranteed.
23% 40% 69% 89%
>5 years 4-5 years 2-3 years ±1.5 years YEARS TO RETIREMENT
AVERAGE LONG-TERM
6.5% 5.0% 3.0% ±1.5% RETURNS ABOVE CPI (%pa)
Some living annuity providers allow you to manage your The alternative is to invest in a balanced multi-asset fund
own portfolio composition (asset mix). The onus will be on that manages the asset mix for you, based on your choice
you to ensure this remains in line with your strategy. How of portfolio. This is usually the more prudent approach, as it
will you go about this? You could re-balance strategically frees you from making regular investment decisions, at the
every year or two, to return to your pre-determined mix, or risk of succumbing to your emotions at such times.
you could make occasional tactical changes to reflect market
developments or your own convictions.
Either way, you should set rules – a consistent approach is
far more likely to succeed than following your gut instincts
on the day.
20 / 10X.CO.ZACHAPTER 13
The relevance of Regulation 28 in living annuities
Regulation 28 of the Pension Funds Act limits the extent Living annuities are not, per se, subject to Regulation
to which retirement funds may invest in individual assets 28, but in terms of Regulation 39 of the Pension Funds
and asset classes. The main purpose is to protect the Act (“Annuity strategy”), which forms part of National
members’ retirement provision from the effects of a poorly Treasury’s default regulations, living annuities paid directly
diversified portfolio. This is done by limiting the maximum by a fund, or through a fund-owned policy, or sourced
exposure to different assets and asset classes. from an external provider as part of the annuity strategy
must comply with Regulation 28.
The main consequence is that no more than 75% of your
portfolio may be invested in company shares (local and The 10X Living Annuity is compliant with Regulation 39
foreign). The fund may, however, over and above, also (and therefore Regulation 28).
invest up to 25% in property shares.
The other significant restriction is that no more than 30%
of the portfolio may be invested offshore (plus another
5% in Africa).
21 / 10X.CO.ZACHAPTER 14
A word on investment styles: active or indexing?
Investors can choose between two broad styles of investing: to investors, who get to keep more of the investment return.
indexing and active management. The industry discussions Compounding these cost savings over many years, the long-
around these two styles have carried on for decades already; term investment outcome improves dramatically.
it’s an emotional subject, with strongly entrenched views on
both sides. Individual actively managed funds do beat the market every
so often but, empirically, only around 10% to 20% manage
An index fund tracks the performance of a pre-determined to do so over longer time periods, after taking account their
index, such as the FTSE/JSE All-Share Index, by mirroring the higher fees.
composition (share make-up) of that index. The investment
earns the return generated by that index, no more, but, With no way to identify these winners beforehand, the odds
importantly, also no less. of coming out ahead with an active manager are quite low.
The alternate, an actively managed fund will endeavour Index investors also avoid the risk of choosing a fund
to do better by deviating from the index composition, manager who falls well short of the benchmark return and
underweighting (or avoiding) some shares and over- impairs their potential retirement income.
weighting others. This is known as ‘stock-picking’.
It’s for these reasons – high active management fees, poor
Because indexing is an automated process that does not results, and the risk of severe under-performance – that
require expensive fund managers and research analysts it investors globally choose index funds in ever greater
is cheaper than active management. The cost saving accrues numbers.
ACTIVE TRACKING
INDEXING
22 / 10X.CO.ZACHAPTER 15
Which annuity is right for you?
Choosing between a living and a guaranteed annuity requires a careful evaluation of your personal needs, circumstances
and priorities.
You must consider a host of factors that are specific to your own circumstances: your health, age and life expectancy, how
much you have saved, your desired income (lifestyle), whether you prefer a secure or a flexible income, your ability to make
sound investment decisions, the needs of a financially dependent spouse, potential bequests, and, on a more subjective
level, prevailing interest rates (which drive annuity prices), and – if you have strong views on this subject – the inflation
and investment outlook.
Guaranteed annuity considerations Potentially, such a move will cost you dearly in a few years’
The appeal of a guaranteed annuity is that it pays you an time. If you cannot come out on with the income offered
income for the rest of your life. There’s no need to worry by a guaranteed annuity, then this is probably the product
you should be using. By choosing a living annuity instead,
about the market’s ups and downs or lose sleep over how
and drawing a higher income, you are very likely to suffer
your portfolio is doing. If you expect to live long (you are
a drastic drop in lifestyle sooner rather than later. You are
healthy and have longevity in the family) then you are likely
likely to end up with a much lower income than if you had
to get back more than you paid in.
settled for the guaranteed income initially.
In that case, you could consider using at least part of your
retirement fund to buy a guaranteed annuity (growing with
inflation) that will cover your fixed expenses for life.
The downside of a guaranteed annuity is its lack of flexibility:
you are locked in for life. You cannot change your income,
or the type of annuity you have chosen, or your provider.
And if you die young, your capital is lost.
You may be tempted to buy a level annuity rather than an
inflation-linked annuity, because it pays out more initially.
But you then run the risk that your income gradually loses
purchasing power. This can come back to haunt you in
later years.
The other problem with a guaranteed annuity is that it may
simply not pay you enough to sustain even a scaled-down
lifestyle. A living annuity will allow you draw a higher
income upfront.
23 / 10X.CO.ZALiving annuity considerations
In contrast, a living annuity provides no guarantees, but a lot Your age is also a factor. If you retire young, a low-cost living
of flexibility. Your major risk is that your drawdown hits the annuity may serve you better than a guaranteed annuity as
17,5% withdrawal limit and that your income will no longer the latter will factor in your increased life expectancy and
keep pace with inflation. pay out much less. But in your seventies, the guaranteed
annuity is likely to pay out much more, as your life
This ‘longevity risk’ is primarily a function of your income expectancy has fallen.
needs relative to your savings balance. If you can maintain
your lifestyle at a drawdown rate of 4% or less at the
beginning (growing with inflation thereafter), you are
unlikely to run out.
But you must be able to live with the associated investment
risk. This can manifest as either a poor long-term investment
return, or as intermittent market volatility, forcing you
to draw down on your savings during periods of market
weakness (ie selling when prices are low). This is more
serious if you suffer poor or negative returns during your
early retirement years.
Ideally, you would be able to reduce your drawdown rate
during such times (possibly by calling on non-retirement
savings to supplement your annuity income, or by cutting
back on your expenses).
You must also be able to deal with your emotions during
such times. Watching your savings decline during a market
correction may tempt you to either switch to a less risky
portfolio or transfer to a guaranteed annuity. Either way,
you would then be locking in your losses.
If you are in poor health, you will probably want your money
sooner rather than later. In that case, a living annuity with a
flexible drawdown rate may suit you more. This also ensures
that your capital does not die with you.
The same reasoning applies if you decide to emigrate after
reaching retirement age. You may then want to repatriate
your compulsory annuity proceeds as quickly as possible,
by drawing down at the maximum rate every year.
24 / 10X.CO.ZACompromise solutions
Having split your spending into fixed and variable Fortunately, with a living annuity you always have the option
spending, one option is to cover your fixed expenses with to convert into a guaranteed annuity at a later stage.
a guaranteed annuity, and your variable expenses with a The overriding uncertainty persists, however: what will be
variable annuity. the cost of an adequate annuity in the future and how much
money can you afford to spend until then, to preserve the
Another consideration is that your retirement lifestyle will necessary capital?
not be a constant. You may still be very active in your 60s
and 70s, incurring travel and recreational expenses, but One way to take both these unknown of the table is to buy a
these will likely diminish over time. You may thus require deferred guaranteed annuity that kicks in only at a later age,
a higher, more flexible income initially, with a lower but say at age 75 or 80. This type of longevity insurance pays out
more secure income thereafter. only if you actually reach that age, so it is reasonably priced,
and much cheaper than converting to a guaranteed annuity
To this end, you could consider converting your living to later on.
a guaranteed annuity at a later stage. As we get older,
our ability to make informed decisions diminishes; it Yes, it comes at the cost of losing some of your initial
makes sense then to take the issues of life expectancy, savings, but in return you have access to a flexible income,
asset allocation and sustainable drawdown rates off the the certainty of a fixed time horizon and the security of a
table, in exchange for a fixed but guaranteed income. known and guaranteed income beyond that.
In summary
Choosing the appropriate post-retirement product is one of the most important, and most complex financial decisions you
will make in your life. To compare alternate options, you should ideally consult an appropriate retirement planning tool (such
as the 10X Retirement Income Calculator) and, if you are unsure, a financial advisor before making your decision. Only obtain
advice from a reputable financial organisation and separate the advice fee from the investment product you choose.
25 / 10X.CO.ZACHAPTER 16
Switching providers
One valuable feature of a living annuity is that you can change your service provider. You can move your living annuity from
one company to another, without restriction or penalty. This is not possible with a guaranteed annuity. With a guaranteed
annuity, once you have paid over your money to the insurance company, you are stuck with them for life.
Given that you’re already in control of your investments and your income, the ability to move your savings may seem
redundant. But there is one aspect you have little say over: the fees that your current service provider charges. So if you are
paying excessive fees (more than 1% pa in total), then being able to switch to a lower cost provider is a very valuable benefit.
It is a fairly simple process to move your living annuity. It requires that you apply to your prospective annuity administrator
and give formal notice to the incumbent. The rest happens behind the scenes. If you are joining a low-cost provider there
should be no initial fee, and no compulsory advice fees.
There are other reasons to switch providers, besides costs, such as poor service, or poor planning tools, or inappropriate
investment choices.
Note, however, that you will not be able to bypass regulatory drawdown limits by switching. Your original policy anniversary
date will follow you to your new provider and your annuity income and payment frequency will remain the same until the
next policy anniversary date. You will also not be allowed to split your living annuity between two or more providers.
Some important rules regarding living annuities
Your annuity income: Transfers:
You may specify your annuity income as a rand amount A living annuity can receive transfers in only from a
or as a drawdown rate. Your drawdown must be between retirement fund or another living annuity. You may transfer
2.5% and 17.5% of your investment balance (net of fees) out to another living annuity or to a guaranteed annuity
per year. This percentage is calculated on the value of your offered by another provider. You cannot split your living
living annuity at the policy date (the date your living annuity annuity between two or more providers.
becomes effective) and on subsequent policy anniversary
dates. You can request a change to your next year’s income Additional contributions:
before every policy anniversary date. You can add proceeds from other retirement funds to your
existing living annuity. You can then choose to leave your
Tax: annuity income unchanged or to increase it proportionally,
You do not pay tax on the amount transferred from your based on your existing drawdown rate.
retirement fund to a living annuity. You also do not pay tax
on the investment return you earn in your living annuity You cannot make voluntary contributions, but you can
(capital growth, interest and dividends). However, your route such contributions through a retirement annuity
annuity income, including any cash lump sum commuted by fund, followed by an immediate transfer to a living annuity.
you, will be taxed according the prevailing income tax tables. Transfers from another living annuity must – by law – be
Your income is paid out net of this tax. invested in a separate policy.
26 / 10X.CO.ZABequests: your latest intentions and circumstances. Bequests that
Any residual value in your living annuity after your death is cannot be fulfilled fall into your deceased estate.
distributed to your nominated beneficiaries. The amount
Divorce:
does not form part of your estate.
a living annuity does not fall within the joint estate and
cannot be split on divorce. The administrator may also
Your beneficiaries can elect to receive the residual value
not split the payout between two parties.
as a lump sum (in which case Retirement Lump Sum tax is
deducted prior to the payout) or they can transfer it tax- Commutation:
free to another annuity product (in which case they will pay If your balance at any time falls below the amount
income tax on the annuity income). prescribed by the Income Tax Act (currently R75,000 or
R50,000 if you took a cash lump sum at retirement),
You should keep your nomination form up-to-date, to reflect you may withdraw the balance.
Should you draw your income annually or monthly? applied by the annuity provider on the assumption that this
is your only income.
You can elect to receive your income monthly (in arrears),
or quarterly, six-monthly, or annually (in advance). Although If you receive other income, for example from part-time
most of us are used to a monthly income, your expenses work or other annuities, then this tax deduction will be too
may not accrue evenly over the year, in which case an low, leaving you to do a top-up payment at year end. To
annual payment may serve you better. avoid a nasty tax surprise, you can request a tax directive
from Sars, instructing the annuity provider to deduct tax at
You may want to have immediate access to your money to a higher rate.
fund emergencies or larger purchases. However, this is on
the proviso that you can manage your cash prudently over
the year.
The advantage of a monthly income is not only that
it disciplines your spending – avoiding an end-of-the-
year-Salty-Cracks scenario – but also that your portfolio
divestments are spread over regular intervals, which puts
you at less risk of poor market timing.
Tax considerations: don’t get caught out by top-up
payments
Both your guaranteed and living annuity payouts are taxed
as income, by way of a withholding tax (much like PAYE),
according to the standard income tax tables. The tables are
27 / 10X.CO.ZACHAPTER 17
The 10X Living Annuity
We have seen that to make your retirement savings last throughout your retirement, you need to minimise fees, maximise
returns (in terms of your choice of portfolio and investment style), and draw a sustainable income. These features are
incorporated into the tools and the design of the 10X Living Annuity, to help you make the most of your savings.
The 10X Living Annuity charges a maximum fee of 0.87% (including Vat), which reduces for amounts above R5m. There is no
separate charge for advice or administration.
The 10X High Equity portfolio provides a well-diversified,
high-growth asset mix, with exposure to both local and
international equity markets. 10X uses index funds to
achieve competitive returns.
The 10X Retirement Income Calculator will help you
determine your sustainable income, given your savings, age,
gender, expected drawdown terms and choice of portfolio.
10:30 AM
The 10X Living Annuity
calculator is designed to
Use the 10X Living Annuity Calculator
help retirees figure out:
See how much income you can draw How much money they
each month to last your retirement years.
will get per month
Looking good!
Your sustainable income until age 85 is R27.5k pm How long their
and your desired income is R22.9k pm
Show me detailed graphs investments will last
Desired R22.9k pm
LAST UNTIL AGE 98
Sustainable R27.5k pm
LAST UNTIL AGE 85
Pre-tax Monthly Income R22.9k pm
28 / 10X.CO.ZAYou can also read
