Let’s be honest, if I did not make this look like a post about the lockdown no-one would read it. With COVID-19 spreading, we are all losing money somehow. So I decided to focus on the costs that we can control: fees in our Retirement Annuity (RA). So, today I want to help you pick the cheapest RA in South Africa.
The fee structures of the different offerings mean that the simple answer to this question is, it depends on the amount you invest. We also have a new player in the retirement space. It will be interesting to see how the Outvest offering stacks up to the established RAs. Before we start, we need to address Regulation 28. This will give us some insight into why the retirement annuities are investing in certain products.
Regulation 28 specifies that you cannot invest more than 75% in equities. This is to limit the volatility of the RA. There is also a further limitation stating that you cannot invest more than 25% in foreign equity excluding Africa. So if you maxed out your equity it will typically have 25% in foreign equity, 5% in Africa and 45% in South Africa (adding to a total of 75%). Lastly, there is also a cap on the total investment in property of 25%.
The cheapest RA option from Sygnia is the Skeleton Balanced 70 Fund. According to Sygnia, the fund is “a medium- to high-risk multi-asset-class global balanced portfolio managed on a passive basis.” It is the fact that it is investing in passive products that significantly reduces the costs.
As expected, the fund predominantly invests in the local market. The total Equity in the fund is 74.2%, close to the 75% maximum. It also has 27.1% invested in foreign equity, which means that a portion of the funds is invested in the rest of Africa. The fund also invests 25% of the capital in bonds and cash, which will limit the volatility. Lastly, the amount invested in property is extremely low at 0.7%.
The Skeleton Balanced 70 Fund has a flat fee of 0.54% making it an extremely attractive offer.
The cheapest RA offered on the Easy Equities platform is the Emperor Balanced RA. Most of the Emperor RAs offered on the platform has similar pricing, but I’m focussing on the funds with higher equity exposure for long-term growth. The asset allocation of this fund can be seen below.
The total exposure to equities in this fund is 65%, which is well below the maximum exposure. The fact that foreign exposure is more than 25% also means that the fund has at least 4.64% invested in Africa. The fund has decent exposure to local properties and significant exposure to local bonds. Bonds are returning less than cash investments at this stage but at a lower risk. You can read more about this in my article risk identification in your portfolio.
On the Easy Equities platform, you can invest in any of their managed funds. These have varying fees between 0.6% and about 1.5%. On top of this, you pay a platform fee to Easy Equities of 0.3%. If you choose the Emperor Balanced RA with a fee of 0.6% and add to that the platform fee, your total cost is 0.9%.
10X has a High-, Medium- and Low Equity Fund. You can choose any one of these or opt to automatically switch to lower equity funds as you approach retirement. The best breakdown that I could find of their high-equity fund can be seen below.
They maximise your exposure to equities and I assume the maximum foreign allocation will also be used. The fund has a big exposure to cash and bonds and smaller exposure to property. 10X tries to simplify investing but this also comes at the cost of analysing exactly where your money will be invested.
10X charges different fees depending on how much you have invested. On the first million, they charge 1.04%, on the next R4 million, they charge 0.81%, 0.58% up to R10 million and a flat fee of 0.4% on anything more than R10 million.
The high equity fund from Nedgroup is called the Core Accelerated Fund. It focusses on investing in equities and property, with almost 90% of the investment in these two asset classes. Most of the equity investment is in local assets.
The Nedgroup Core Accelerated fund has a flat fee of 0.82%.
The Outvest fund with the highest equity exposure that is still regulation 28 compliant is the Coreshares Outmoderate Index fund. It invests 67.4% of the fund in equities, with only 13.7% in global equities. It is heavily invested in property and bonds, with local products being favoured. Only 2.1% of the fund is invested in local cash products which is lower than most other RAs.
Outvest has a fee structure that they call ONEfee. The fee for anything below R300 000 is 1.5%. When your investment reaches R300 000, the fee is locked at R4 500 until your investment reaches R2.25 million. For anything above this amount, you pay a fee of 0.2%.
If I had to pick one of these RAs simply based on asset allocation I would have to go with the Sygnia Skeleton Balanced 70 Fund. I like that they are maximising their equity allocation and that the maximum investment into foreign equity is utilised. Fortunately, as you can see in the chart below, it is also the cheapest fund if you are investing small amounts.
As your capital grows, the offering by Outvest becomes much cheaper than the other options. The breakeven point between the RAs from Sygnia and Outvest is at R900 000. So if your goal was simply to invest in the cheapest RA you can start with Sygnia and transfer your money once your capital reaches R900 000. As far as I can see, it does not look like Sygnia has a cancellation fee, so it should be feasible.
I would prefer that Outvest invested more of the fund into global shares, but who am I to question the fund managers. If fees are the best predictor of future performance, it makes sense to do it in this way. All of these are good options and I won’t be able to tell which fund will outperform the rest. So pick the one with the cheapest fees and start investing. Starting to invest sooner is more important than choosing the cheapest RA between these options.
Be safe out there,
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If you have any other RAs that you want me to add to this comparison, please post it in the questions section below. Remember to add the annuity provider and specify the fund that you would like me to look at. This article specifically looks at high-equity options, so please limit your suggestions to similar products.
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