HOW SAVVY RETIREES CAN GIVE THEMSELVES A 40% PAY RISE

BY MICA TOWNSEND

Few retirees realise that the fees on their living annuity are likely to be their singlebiggest expense in retirement,and that switching to a low-costprovider could boost their financialposition significantly, withoutcompromising their lifestyle.

A large majority of retirees puttheir pension savings into a livingannuity rather than a guaranteedannuity, because it leaves themin control of their money. Unlikethose in guaranteed annuities,they decide how much income theydraw (within regulatory limits), howtheir money is invested, and whoinherits the balance after they die.

Another important factor thattends to be overlooked is thatliving annuity holders can changetheir service provider, usuallywithout restriction or penalty.With a guaranteed annuity, onceyou have paid over your money tothe insurance company, you aretied to them.

Since you are in control ofyour investments and income,the option to move might holdlittle allure. But if you are payingexcessive fees (more than 1% pain total), being able toswitch providers isvery valuable.

Few living annuity holders appreciate that retirement savings are depleted by fees, focusing solely on their drawdown rates. If you are drawing down at, say, 5% pa and paying fees of 2,5% pa (plus VAT), you are drawing down almost 8% per year (fees of 2,5% pa 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).

If you can afford to draw down at 8% pa, incurring 2% pa less in fees means you could draw down at 7% pa instead of 5% (translating into an instant 40 percent pay rise) without accelerating the depletion of your savings.

To illustrate, assuming you draw down 5% from your R4,8m pension pot, you will receive a pre-tax income of R240 000, or R20 000 per month. At the industry’s average fee rate of almost 3% pa, you would be paying costs of around R144 000 pa (R12 000 per month). You would be paying yourself only two-thirds more than your service providers. Or, from another perspective, almost 40% of your drawdown goes to fees.

Moving to a low-cost provider, such as 10X Investments, which charges less than 1% pa 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, a far more equitable split.

But drawing down at 8% per annum will deplete your savings quite quickly. The more prudent option would be to keep your income unchanged, and let the 2% pa 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, you can work out your own numbers using the 10X Investments’ Living Annuity calculator: https://www.10x.co.za/ living-annuity#calculator

It is a fairly simple process to move your living annuity. 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.

Additionally, there are other good reasons besides costs to switch providers, such as bad service, poor planning tools, or inappropriate investment choices.

The 10X Living Annuity does not charge for advice or administration and investors pay a maximum fee of 0.87%, which can reduce to as low as 0.40% depending on your balance. If you are in any doubt, ask 10X to do a free, no-obligation cost comparison today: https://www.10x. co.za/campaign/fee-comparison •

Mica Townsend is Business Development Manager and Employee Benefits Consultant at 10X Investments.