The costs of a Retirement Annuity

There will always be costs associated with investing in retirement annuities. The issue is the quantum of the costs and whether you are receiving value for money.

The issue of the costs levied on retirement products has come under scrutiny since independent actuary Rob Rusconi presented a paper on the subject at the annual conference of the Actuarial Society of South Africa last year. Rusconi’s argument was not that the costs were not justified, but that the level of costs was not justified.

His research showed that retirement funding costs are extremely high in South Africa, particularly on life assurance products. He posed the question of how much more money people would have for their retirement if the costs were lower.

The issue was taken up by Parliament’s Portfolio Committee on Finance and filtered through to the National Treasury, which is redrafting the Pension Funds Act. Since the government focused its attention on the issue, the life assurance industry has been under pressure to come up with better low-cost products that do not include confiscatory penalties if you reduce your contributions.

One of the problems with costs is that RA product providers manage to conceal the real impact of costs. When they do disclose these costs, they do so in a number of confusing ways to ensure that you will not have a clue what you are actually paying.

It is important that you insist on costs being disclosed to you in various ways.

Costs should be fully disclosed and limited. In other words, they should not be left to the future discretion of a life company. The costs should be disclosed as initial and on-going and in three ways:· In rands;· As a percentage of premiums; and· On a reduced-yield basis.

The reduced-yield method is a simple way of showing the impact of costs.

To calculate costs on a reduced-yield basis, take the total amount you would pay in premiums over the contractual period and then deduct the total costs.

It is also best to use an assumed growth rate, particularly if the costs include investment performance fees. If you are being charged a performance fee, you should assume different growth rates of, say, five, 10 and 15 percent, so that you can see the effect that the performance fees will have on your investment.

You must get a full list of all costs, including all underlying costs that may be involved in complex investment structures.

It is important that you compare the cost structures of the products offered by different companies.

Here is a table that you should have your financial adviser complete:· List all costs/fees:

* Commissions/advice fees
* Administration fees
* Policy fees
* Asset management fees
* Underlying asset management fees
* Performance fees
* Other fees· Initial costs:

* As a percentage of premiums
* As a rand amount
* Annual (on-going) costs:
* As a percentage of assets
* As a rand amount· Reduction in yield calculation:

* Total amount invested
* Less total costs paid in rands
* Annual percentage reduction-in-yield
* Total percentage reduction-in-yield
* Total rand reduction-in-yieldIn spite of all the bad things you may have read about retirement annuities (RAs), they are essential investment vehicles for most people – provided, of course, you understand what they are and how to derive the maximum benefit from them.To learn more about the top ten things to know about a retirement annuity

Tags: annuities, retirement annuity

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The costs of a Retirement Annuity

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