A financial advisor who recently tried to transfer the old generation retirement annuity (RA) of his client from one product provider to another, got a nasty surprise: the original provider imposed a fee of more than 15% of the client’s fund value.
A financial advisor who recently tried to transfer the old generation retirement annuity (RA) of his client from one product provider to another, got a nasty surprise: the original provider imposed a fee of more than 15% of the client’s fund value.
Naturally the advisor was not impressed, and did not want his client to pay such an exorbitant fee.
This article considers six important questions you should ask before you invest in a RA.
Charlene Swartz, head of retail investment administration at Sygnia, says there are primarily two types of RAs available in the local market.
The first is a RA backed by an insurance policy, issued by a life company. These types of RAs generally charge significant upfront fees and if the investor transfers the vehicle to another provider or stops contributing due to changing circumstances, he or she will likely incur penalties, she says.
The second is an investment-linked RA where the underlying value of the fund is related to the chosen investments. While the asset manager will also impose certain fees, there are no penalties when contributions are terminated or paused or if the investor moves to another product provider.
Up to a certain level, contributions to a RA is tax deductible – essentially government assists South Africans to save for their retirement by offering a tax break for contributions to retirement vehicles.
Dave Johnson, company secretary at Sygnia, says while investors may regard the inaccessibility of RA investments as a negative (you can’t access the funds in a RA until the age of 55) it is a significant benefit in the long run as it eliminates the spending temptation.
Swartz says there are broadly three levels of fees that may apply. The first is the administration fee (this will vary depending on the service provider). Some service providers charge an initial administration as well as an on-going fee, but nowadays the majority of providers do not charge initial fees.The second level of fees is the investment management fee, which is based on the underlying investment choice. Unit Trust A may for example charge a 1% management fee, while Unit Trust B may levy a 30 basis point asset management fee.The third layer of costs is related to the advice fee.
Some financial advisors charge initial fees, which can be up to 2% depending on the size of the investment. Other advisors only levy on-going fees, which can range from 25 basis points to 2% per annum.
Investors should try and negotiate these fees, she says.
Johnson says investors should be cognisant of the impact of fees on their monthly contribution (what percentage of the actual contribution ends up being invested) and how fees impact the investment growth.
Investors may have unlimited choice of investment portfolios, but if their returns are reduced by three percentage points as a result, it may not be worth having that access, he says.
Johnson says an investor may be self-employed and in a position to contribute R500 a month to the RA, but may join a company where membership of the employer’s pension fund is compulsory and want to reduce or terminate the contribution.Investors should consider how the service provider will deal with changes to contributions and whether penalties will be applicable. It is highly unlikely that an investor will be able to commit to a specific contribution for 30 years without ever having to make any changes, he says.
Investors should consider whether the underlying investment choice in the portfolio is limited to one asset manager or insurer’s range of products and ask themselves what their options would be if the top quartile-type performers start to underperform, Johnson says.
Swartz says as the investment outlook change, investors may want to introduce changes to the underlying portfolio. Investors should ask if changes to the portfolio can easily be introduced and what fees would apply.
Poor service or unreasonable fee structures may move investors to change from one fund to another. They should consider if this would be possible and what the implications would be, Johnson says.
Johnson says it is important to consider the composition of the board of trustees.The sponsor of the retirement annuity (the insurer or asset manager) typically appoints the fund’s trustees. Generally at least one of these trustees has to be independent, but in some cases more than 50% of the trustees are independent.He says investors should consider how the trustees link back to the sponsor. Independent trustees on a board of the retirement fund should ensure that decisions are made in the best interest of the members rather than the interest of the sponsor.