What can you do if your retirement annuity is worrying you?

Do you have a retirement annuity (RA) that is worrying you. Is it stopping you from making the right decisions about your retirement?

The end of the tax year is a good time to check whether your savings are on track to deliver the income you need in retirement and whether you are maximising the tax deductions for retirement savings. Read more: How much do I need to save for retirement? and use our Tax deductible retirement fund contributions calculator.

If those check-ups confirm you need to save more, but you are not sure your existing RA is serving you well, you need to ask yourself what it is about the RA that is troubling you, Wouter Fourie, an independent financial planner and director of Ascor Independent Wealth Managers, says.

Check performance

If the cause of your unhappiness is the performance of the RA investments, consider whether this is because of the current state of the market. Fourie says it's worthwhile remembering that when markets are down you may be buying more units in the underlying unit trust funds. When markets recover, the price of those units will recover.

Also don’t forget to factor in the tax benefits you have enjoyed from investing, he says.

Fourie says your RA may be underperforming because you are invested too conservatively and not exposed to enough growth assets – equities and listed property. It is worth getting a second opinion from a good financial adviser, he says.

He suggests trying to fix the problems within the product by switching the underlying funds.

Read more What do I need to know about investment risk? and How can I find a good financial adviser?

High costs

Both Fourie and Craig Gradidge, an independent financial planner and founder of Gradidge Mahura Investments, agree that investors in older RAs often face high costs on their investments.

“They are hellishly expensive, and eat into investors’ returns quite meaningfully,” Gradidge says.

“This is especially true in the low return environment that we have experienced in the past five to seven years. Some of these RA products have costs totalling 3.5% to 5% a year.

“Balanced funds have returned an average of 5.8% a year over the past seven years. Investors in expensive RAs would therefore have earned between 0.8% and 2.3% a year after costs had their portfolio delivered the average performance.

“New generation RAs are priced from 1% to 2% including investment management, administration and advice fees, which is a lot more palatable in a low return environment,” he says.

Fourie says some older RAs offer guarantees on capital or returns, which does not make sense when you are saving over a long term for retirement. Financial markets typically recover their losses over longer periods making guarantees, that come at a cost, unnecessary. 

Gradidge says old generation RAs often offer you “bonuses” or “boosters” if you remain invested for long periods, but if you are unable to maintain the terms of the contract, you face stiff penalties. He believes it is always best to go for well-priced products.

Transferring an RA

You can transfer your RA from one provider to another using what is known as a section 14 (under the Pension Funds Act) transfer, but beware of penalties if your RA is a contractual one with an investment term and commitment to contribute monthly.

Get a quote to see what penalties you will be charged to withdraw from your existing RA, Fourie says.

Compare the costs of the old RA to any other you are considering using the effective annual cost of each, but be sure you are comparing apples with apples, he says. Read more: How do I measure costs on my unit trust fund?

It is no good comparing the cost of investing in an RA which has underlying investments in money market funds to one with underlying investments in multi-asset funds, he adds.  Read more: Why are there different kinds of multi-asset funds?

Ideally work with an adviser who has enough experience to advise you whether the switch is in your interests, he says. 

Gradidge says he only advises switching from older RAs to new ones if you will definitely make up any penalties applied for closing the old RA through savings in fees before you reach retirement age. Each case has to be considered on its merits, he says.