Nicolette Dirk, finance writer, Justmoney.co.za
Retirement annuities (RA) still remain the savings vehicle of choice for many investors. But is the traditional life based RA still applicable to the needs of today’s investor? And what do the other options offer you?
There are two different kinds of retirement annuity (RA) to choose from. The first is a traditional RA, which is underwritten by an insurer and offers a policy-based savings solution. An investor commits a lump sum investment for a set investment term, or is required to pay an agreed investment premium (which may escalate annually) at regular intervals over the full period of a set investment term.
The second is a new generation, unit trust based RA, which is offered by an investment company. By allowing investors to invest directly into unit trusts, this type of RA does not involve the issuing of a policy.
“Investors may therefore also choose to make lump sum or debit order contributions, but do not have to commit to remaining in that particular RA or upholding debit order contributions for any specific period,” Hugh Malherbe, product specialist at PPS Investments.
How do the benefits compare?
Malherbe said a policy-based RA typically charges certain fees upfront. “A number of costs and service charges (e.g. advice fees and servicing costs) over the predetermined investment period are calculated. This total cost is then spread and charged in monthly instalments.”
He added that should an investor choose to move to a different RA or reduce debit order contributions before reaching the predetermined end date of the investment, he or she will be held responsible for settling the outstanding monthly fees set to be charged in future, as calculated at the onset of the investment. The recoupment of the outstanding fees is presented as a termination charge.
Certain policy-based RAs use a bonus payment or loyalty reward structure. Investors receive a payment after certain investment period and upon completion of the predetermined investment period.
These loyalty bonus payments are typically funded by high initial and ongoing administration fees. Should an investor choose to move to a different RA or reduce debit order amounts, the bonus payments are withheld.
A unit trust based RA tends to be more cost effective, offering when it comes to fee structures. According to Van der Merwe the price of traditional RA's went up after unit trusts became accessible to the man on the street.
A policy-based RA tends to lump all fees together, making it difficult for investors to tell exactly which fees they’re being charged and how much each individual fee amounts to.
A unit trust based RA offers a simpler structure, which clearly sets out exactly how much investors are paying, precisely what they’re paying for and how their savings are being invested.
Louise Van Der Merwe, financial advisor for Wealthup, said that due to the fees included in a policy based RA, usually unknown to the investor, they could end up with less than they expected when they retire because so much of their contribution is used for commission fees.
Malherbe said that due to the possibility of a termination charge or foregone future bonus payments, investors in a policy-based RA are afforded less flexibility to move between product providers or make certain changes to their investments.
Van der Merwe said that in today’s working environment, where people no longer stay at one company for decades, a policy-based RA is not the best option.
“With a life based RA. You get penalised when you stop contributing and legally they can charge up to 25% of your fund which is a lot of money,” said Van der Merwe.
On the other hand, as a unit trust based RA poses no potential termination fees it offers investors the flexibility to move to a different product provider or alter investment contributions as needed.
Malherbe said this is important when investors are faced with unforeseen events, such as an unexpected loss of income, retrenchment or other immediate financial priorities.
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