David asks: I want to take out a retirement annuity (RA), but I don’t know which one will be best for me. What is the best premium that one can pay and which company would you recommend?
Maya replies: A lot has changed in the retirement annuity industry over the last few years. The main one being that RAs are no longer only sold by life companies. You can now also buy an RA through select unit trust companies.
An RA sold as a policy through a life company is not flexible in that certain penalties apply if you stop contributing. This is in order to recover commissions already paid to the broker.
Although these so-called “reduction in surrender values” are now legislated, it does mean that you could lose a portion of the funds you have invested.
Although your intention hopefully is to contribute until you retire, your circumstances may change and you do not want to be penalised for that.
As a result, unit-linked RAs have become more popular as these do not reduce in value if you stop contributing.
Most life companies like Old Mutual, Liberty, Sanlam, Momentum sell unit-linked RAs. These in turn invest in underlying unit trusts. However, from a cost point of view, investing directly with the unit trust company that will be investing your funds is cheaper. Unit trust management companies like Investec, Allan Gray and Coronation all have platforms that allow you to invest into their funds via a retirement annuity structure. If you go directly you do not pay an adviser fee, which further lowers your costs. Information on these funds can be found on the unit trust websites.
The only downside is that you are invested with only one fund manager compared to being spread across several different managers. However, as these companies are among the leading fund managers in the country, that will have less of an impact than the cost you will be saving in the long run.
Contributions:
You can contribute 15% of your pensionable salary to a retirement fund. From next year that increases to 22,5% of your total income. If you are already contributing to a company pension fund, speak to an accountant about how much you can still contribute to an RA for maximum tax benefit.
Comparing costs:
When comparing RAs, check for “reduction in yield” — the higher the reduction in yield, the higher the costs. However, this only takes the product costs into account and does not include adviser fees, so if you do use an adviser make sure you fully understand both the upfront and ongoing fees. Ongoing fees have a serious impact on your final return.
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