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It is not uncommon for investors to move their investments from one insurer or asset manager to another.
Whether it is because of the promise of better returns, to lower costs or just not being happy with the current company, investors do move their investments from time to time.
But what happens when you move your existing retirement annuity to another insurer at the advice of a financial adviser promising better returns but the exercise ends up costing more money?
First of all, as an investor, you are allowed to move your retirement annuity from one insurer or asset manager to the next via a section 14 transfer, which entails transferring your existing retirement fund to another approved retirement fund.
Say, if you have an existing retirement annuity with Liberty and you transfer the retirement annuity to Allan Gray as an example: Since you are transferring from one approved retirement fund to another, there would not be any tax charged on your funds.
This transfer can also apply to preservation funds.
At the end of last year, I did a coaching session with a client who was 42 years old; her financial consultant advised her to move her existing retirement annuity to another insurer.
The adviser recommended this move because, according to her, with the new insurer the client would end up with more money at retirement age.
Now let’s examine the client’s case:
The client’s retirement annuity value was R627 000 and she was contributing R5 000 a month.
Because she was leaving the retirement product earlier than agreed on the contract, she would have to pay a penalty fee of R91 000. Yes, you read that right, R91 000.
From having R627 000 to R536 000 in the name of better returns in the future is just too much of a heavy price to pay. The client didn’t just lose R91 000 but lost on the compounding effect that R91 000 could have had.
If you take R91 000 and invest it over a period of 13 years (say the client wants to retire at the age of 55) with a growth rate of 9%, what is the future value?
Present Value: R91 000
Years: 13
Interest: 9%
Future Value: R278 988
Therefore, by paying the penalty fee, the client didn’t just lose R91 000 but potentially lost out on almost R300 000. But it doesn’t end there … on top of that, the adviser charged a 1% upfront advisory fee (R5 360) and otherongoing costs.
The product from which the client was moving was not much different to the new product the client was going to, with both products’ total expense ratio ranging from 2.1% to 2.3%.
It made no sense that the client was advised to transfer her retirement annuity, except for the benefit of the adviser who would get the upfront fee plus the ongoing advice fee.
Before you transfer any investment, your adviser has to provide you with a detailed analysis and you have to look at the cost-benefit ratio.
How much lower do the fees need to be?
You must ensure that the lower fees or potential higher returns with the new retirement annuity will compensate you for any penalties associated with the transfer.
In this case, if the client moved to another provider and reduced the annual fee by 1% a year, over 15 years that saving would have resulted in approximately R300 000 more in retirement, even after paying the penalty.
However, if the new investment reduced the annual fee by only 0.5%, then she would have had less in retirement than staying with the original product due to the penalty cost.
(Here I did a simple calculation using 10% a year return with the fees reducing the return to 9% or 9.5%, respectively.)
In this particular case there was virtually no annual cost saving and the upfront fee would have diminished the returns even further. It clearly made no sense for the client to switch.
What other options are there if you feel like you are not getting the most out of your retirement annuity?
1. First look at what it will cost you to transfer the retirement annuity. There are penalty fees on exit (life assurers charge penalties to recover the commission they paid to financial advisers when the policy was taken out) and also potentially upfront fees charged by the adviser or new product.
2. Should the cost be too high, you can opt to cancel the debit order (make the policy paid-up), which I am afraid can sometimes come with a penalty as well, although not as high as transferring the entire fund. But again, do an analysis to see if the benefit outweighs the cost.
3. Then, for the same amount, start contributing to a new generation, low-cost retirement annuity.
Don’t get me wrong, there are brilliant financial advisers who do look out for their clients but the onus is still on you the investor to do your homework. Don’t become complacent about the advice given, ask questions, educate yourself and even get a second opinion on these matters.
After all, no one should have more interest in your money than you.
Mapalo Makhu is a financial planner and finance coach
