Choosing a low-cost RA
TWO OPTIONS: LIFE INSURANCE COMPANY VS LISP PLATFORM
You need capital growth at reasonable risk, with some flexibility.
annuities (RAs): those by a life insurance company like Sanlam, Discovery, Liberty etc, or by a linked investment service provider (Lisp) platform like Allan Gray, 10X, Glacier etc.
Life company products (like the Sanlam Cumulus Echo Retirement Annuity) tend to be somewhat rigid. You’d enter a contract to pay your premiums plus increases for a certain number of years and remain invested until 55 or later. You’re likely agreeing to pay your financial advisor in advance for all those years of future service, assuming they give ongoing support.
If you make any changes to this contract, the life company is within its rights to apply expensive penalties to your saved capital, which would reduce real returns.
For example, a new employer could insist you join the company pension fund – your total salary contributions would then be over the legislated 27% maximum. Or you could be offered a job outside SA. In either scenario you’d need to change your contribution or planned increases. The life company could apply penalties.
Fees tend to be higher in these types of retirement vehicles. Compare the effective annual cost (EAC); it also lets us value and account for any “bonuses” offered and all other costs. Pay attention to the EAC in the short-and long term.
When comparing unit trust fees, compare the total investment costs, which include transaction costs and the total expense ratio (which includes any performance fees).
Our EAC analysis shows life companies struggle to match Lisp platforms’ costs. For investors to reap the rewards of bonuses offered, usually takes many years. Calculating the real costs is vital, as compounding high costs hurts returns and while waiting for bonus rewards, needs can change.
You need capital growth at reasonable risk, with some flexibility.
We believe most investors may be better off using a flexible Lisp platform that gives more investment choices, versus a platform offering only index trackers. The Lisp platforms won’t penalise you if you stop your contributions or make other adjustments. Wellknown companies like Allan Gray and Glacier offer investors a large range of active unit trust strategies and fund managers, and various index trackers.
Your EAC calculations may show that it might be slightly more expensive to use a Lisp platform in the beginning than going directly to an index-tracker platform like 10X or Sygnia. However, longer term, the additional investment flexibility may deliver a profit edge. While index trackers have their place, passive investing in trackers is a cyclical strategy and won’t always outperform as well as they have in recent years.