The traditional policy-based retirement annuity (RA) is underwritten by the big life assurance companies, whereas the “new generation” unit-trust based RA is typically offered by the asset management industry.
Traditional policy-based RAs are usually inflexible. You enter into a long-term contract and frequently incur obligations for decades into the future, specifying how much you must save and for how long.
These traditional RAs are usually sold through a broker and most investors understand that the RA provider pays them a commission. What is not clear is that the full commission – perhaps calculated on 30 years of escalating premiums and valued at tens of thousands of rand – is paid to the broker upfront.
This, along with other “selling expenses”, is recorded as a debt against your RA and attracts interest. This debt is recovered from your RA investment, and adds to the annual cost of your RA.
If you break the contract terms (for example, because you have lost your job and can longer afford the contributions, or you wish to move your RA to another provider), the RA provider accelerates the recovery of this debt. This recovery is called a “termination penalty” and it can cost you up to 30% of your investment (limited to 15% if you took out the RA after 1 January 2009).
You don’t have these issues with a new generation RA. You are not bound to a long-term contract, you can cancel or lower your contributions at any time. You can also take an indefinite contribution holiday, or even switch providers without any causal event charges. All fees (including commissions, if applicable) are recovered on an as-and-when basis only, so there is no charge for unrecovered costs.
Want to know more about your RA? 10X Investments will do a free cost comparison and analysis for you: https://www.10x.co.za/campaign/fee-comparison
For more information to get the best out of your retirement savings download 10X’s comprehensive retirement planning e-book https://resources.10x.co.za/retirement-annuity/south-africans-guide-to-saving-and-investing-for-reti...
Other articles in this series:
Part I: Index funds: Owning the market at a low cost. Hilan Berger, Head of Institutional Business Developments at 10X Investments, shines a light on some investing basics. https://www.10x.co.za/blog/rands-and-reason-index-funds
Part II: Make this the year you max out on tax breaks. Chris Eddy, Head of Investments at 10X Investments, gives the low-down on tax incentives for retirement saving. https://www.10x.co.za/blog/how-to-max-out-on-tax-breaks