Traditional vs new
FIVE QUESTIONS INVESTORS SHOULD ASK When choosing retirement annuity consider if its design serves your or your service provider’s needs
Traditional policy-based RAs are underwritten by big life assurance companies and usually inflexible. They’re long-term contracts and impose future obligations, specifying how much should be saved and for how long. If you wish to cancel/change the contract you’ll pay a penalty. This is because life companies tend to pay the broker a lifetime’s worth of commissions in one upfront lump sum.
New generation unit-trust based RAs are offered by the asset management industry and have more flexibility built in. You can cancel or lower your contributions at any time and take an indefinite contribution holiday without paying a penalty. Fees are recovered on an as-and-when basis only.
Traditional RAs are usually sold through a broker and you could still be allocated a financial advisor even if you go direct. Their commission depends on the terms you agree to: the higher your contribution, your escalation rate, the fund fees and the investment term, the bigger your broker’s commission.
With a new generation RA, you can invest directly with the asset manager of your choice. The advisor (if applicable) can still be paid out of your savings, but at your discretion.
You can contribute up to 27.5% of taxable income or remuneration (tax free) to your retirement funds (pension, provident or retirement annuities). This is capped at R350 000 p.a. Contribute to your retirement savings and you’ll get a discount (through higher take-home pay than you’d get without the tax incentive) or cashback (through a tax refund). You can contribute more, but you’ll be taxed on the amount over and above the first 27.5% or R350 000 yearly cap.
Over and above any advisory fee, you could also incur administration and investment management charges, platform fees and switching costs. Given the dramatic long-term impact of fees, you should ideally pay less than 1% p.a. for all these services. Many RAs can cost more than three times the low-cost alternative. Over a 40-year savings term, lower fees have the potential to double your pension.
Your asset mix should be risk-appropriate for your investment term. As a long-term investor, you should have high exposure to growth assets such as shares (equities) as these habitually deliver the highest return, despite intermittent corrections. Once your time horizon shortens to less than five years, increase your exposure to bonds and cash, for a lower, more secure return. Alternatively, choose a life-stage fund that adjusts your asset mix automatically to your investment time horizon.
Tracy Jensen is COO at 10X