A large majority of retirees put their pension savings into a living annuity rather than a guaranteed annuity because it leaves them in control of their money. Unlike those in guaranteed annuities, they decide how much income they draw (within regulatory limits), how their money is invested, and who inherits the balance after they die.
Another important factor that tends to be overlooked is that living annuity holders can change their service provider, usually without restriction or penalty. With a guaranteed annuity, once you have paid over your money to the insurance company you are tied to them.
Since you are in control of your investments and income the option to move might hold little allure. But if you are paying excessive fees (more than 1% pa in total) being able to switch providers is very 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 R4,8 million 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 on 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
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.
