How retirees can get a pain-free 40% pay rise

Few retirees realise that the fees they pay on their living annuity could well be their single biggest expense in retirement, says Michael Rossouw, senior investment consultant at 10X Investments: “A 2% fee, for example, on a R5m annuity amounts to more than R8,000 per month.” 

He adds: “Another game-changing factor that retirees often don’t know about is that switching to a low-cost provider could boost their financial position significantly without compromising their lifestyle at all.”

The problem, Rossouw says, is that few living annuity holders appreciate that their retirement savings are depleted by fees as well as what they draw down.

If you are drawing down at, say, 5% per year and paying fees of 2,5% per year (plus VAT), you are drawing down almost 8% per year. (Fees of 2,5% per year is the government’s estimate of the industry average, typically made up of 0.75% for advice, 0.25% for administration and 1.5% for investment management.)

Rossouw says: “For the same level of drawdown (8%), you could reduce your fees by 2% and increase your income from 5% to 7%. That is a 40% increase in your income without any change to your overall savings balance.”

He explains further: “Assuming you draw down 5% from your R4,8m pension pot, you will receive a pretax income of R240,000, or R20,000 per month. At the industry’s average fee rate of almost 3% per annum you would be paying costs of about R144,000 per annum (R12,000 per month). 

“You would be paying yourself only two-thirds more than you pay your service providers. Or, from another perspective, almost 40% of your drawdown goes on fees.”

Moving to a low-cost provider such as 10X Investments, which charges less than 1% per year in fees, you could draw R28,000 a month and pay fees of R4,000. You are now receiving seven times more than your service providers, which seems a lot fairer.

But, Rossouw cautions, drawing down at 8% per annum will deplete your savings quite quickly. 

“The more prudent option,” he says, “would be to keep your income unchanged, and let the 2% per annum saving compound within your living annuity. This could add 5–15 years to the sustainability of your income (again, depending on your choice of portfolio and future market returns).”

To bring this to life for yourself, insert your own numbers into 10X Investments’ retirement income calculator. It will calculate what a sustainable income would be, taking your savings balance, your age, fees and inflation into account.

In addition to spending too much of your savings on fees, there are other good reasons to switch providers, such as bad service, poor planning tools or inappropriate investment choices. If you are in any doubt, ask 10X Investments to do a free, no-obligation cost comparison today to see if there is room for improvement in your living annuity.

Moving a living annuity to a different provider is a relatively simple process. You submit an application to your prospective annuity provider 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 or platform fees.

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^{The content herein is provided as general information. It is not intended as nor does it constitute financial, tax, legal, investment or other advice. 10X Investments is an authorised FSP (number 28250). 10X Index Fund Managers (RF) (Pty) Ltd is a Manager registered under the Collective Investment Schemes Control Act, 2002.}