Legislative changes to commission structures may encourage unethical brokers to encourage people to move their retirement annuities. Financial advisers can now charge an ongoing commission when moving a client from an underwritten retirement annuity fund (an older generation product) to a non-underwritten fund (new generation).
The reason for the change in fees was to acknowledge that the financial adviser had provided advice and assistance to the client.
It does make provision for monitoring unscrupulous behaviour, requiring the ongoing fee to be negotiated and agreed to annually so that the member can discontinue payment if he or she feels the adviser is not earning his keep. This should offer protection to retirement annuity (RA) members. However, it is worth asking your financial adviser a few questions first.
Am I really saving money?
Andrew Ruddle, retail investment product manager at Old Mutual, says that when switching, often the costs incurred in the fund will be deducted from the value of the investment, resulting in a reduction in fund value.
Although legislative changes introduced last year limited the reduction to 85% of the fund value, it may still not be recoverable over the remaining term of the new RA. Ruddle says in some cases the new fee structure would have to be half that of the current fees for the member to benefit and recoup the initial losses.
He says that although there is a perception that old-generation products are more expensive, there are many funds that are highly competitive, especially if they offer additional benefits not included in the new RA. It is important that your adviser provides you with a calculation to show you the real cost benefits over time.
What about future performance?
Ruddle says since the legislative changes in September 2007, which allowed members to move their RAs, the main reason for switching has been performance. Switching investments to chase past performance can be a costly mistake.
Remember that a fund that performed well last year may not necessarily outperform next year. Make sure you and your adviser understand the strategy of the investment you are moving to, as well as the longer-term performance.
Will my benefits remain?
Old-generation products often had excellent underlying benefits, which are lost during transfer. For example, some funds offered a minimum guaranteed return or members had the right to purchase an income annuity on retirement at a guaranteed income level which may be above current market rates.
You would also lose any death or disability cover which may have been part of the old-generation product. The same level of cover as a stand-alone product may be far more expensive.
Your adviser needs to show you the cost of replacing those benefits when comparing the new product with the old one.
Does my current RA invest in a smooth bonus fund?
Many old-generation products offered smooth bonus funds.
Old Mutual’s Smoothed Bonus Fund has delivered real investment returns averaging 6% a year above inflation since its inception in 1984 and has not declared a negative return. Even when the JSE fell 8,2% over the year in 2002, the fund delivered positive returns of 4,25%.
Can I switch in-house?
Rather than moving from your current provider, many of the life companies offer switches from old-generation to new-generation products at no cost and, most importantly, you do not lose the value of your existing RA as the fund will still be able to recoup costs over the longer term. Life companies offer a wide range of underlying investments in other asset management houses, so you may not have to change retirement funds if you are considering performance.