Nicolette Dirk, finance writer, Justmoney.co.za
Consumers who purchased an old style retirement annuity may not be getting the best value as the product initially sold may not contain the benefits of new style products on the market.
This is according to Ian Young (pictured), director at LifeSense Financial Services, who added that should investors opt for buying a new product, the damage done to their wealth accumulation should be considered.
What actions should you take to remedy the situation?
Young said the retail environment, of which retirement annuities form a large part, is a long standing market where product design of years gone by place a heavy burden on the investor.
“Another challenge is around typical fees that these existing investors face being at the middle to high end of the scale, as per the Treasury’s own evidence, presented in its July 2013 paper.
Experience shows us that such fees are typically between 2.5% and 5%+ in the ‘historical’ market. It is plain therefore that in such circumstances between 40-60% of savings will be ‘lost’ if nothing is done,” said Young.
To move, or not to move?
Young said he has dealt in cases that revealed how termination penalties can wipe out close to 30% of a client’s accumulated savings.
“A current example is a 36 year old female, with R70, 000.00 accumulated savings – and proposed penalties of R19, 000. A seemingly complicating factor in this case is that contributions are low – a shade under R500 per month. So at face value it appears that little can be done,” said Young.
But despite this case appearing as a no-hope situation, Young said that proposing alternatives resulted in an extreme drop in annual fees from over 5.5% to an acceptable level. The utilisation of a passively managed fund in the place of a balanced managed fund, the “crossover” from a loss position to breakeven - and thereafter a more favourable fund accumulation - can be achieved in approximately four years.
Would it be worth the risk?
Young said it is quite a hard call to make for an individual who has to face the prospect of an immediate “paper” loss and no guarantee of future returns.
“But given the time horizon to remedy this and the potential upside, it is certainly a discussion worth having. Most advisors I speak to are initially surprised by this result – but are more than happy to take up this discussion. It is potentially a win for both parties,” said Young.
Advisors, however, need to ensure they are conversant with low cost, non-traditional suppliers who offer ‘wholesale’ pricing in the retail space.
“Care still needs to be taken to ensure that one compares apples with apples as the industry shrugs off the mantle of opaque disclosure.
Too often there still appears to be ‘partial’ disclosure in certain sectors. The authorities appear to be cognisant of this and the sooner that there is forced, full and proper disclosure of all layers of fees, the better placed the overall industry will be. Transparency is strength, not weakness, and so needs to be embraced,” said Young.