A Fin24.com user writes:
I have had a retirement annuity for the last 20 years and have 10 years to go.
I am only paying about R580 per month and it increases by 10% per year. According to the best-case scenario, the estimated amount at retirement age (55) will be about R450 000.
I am considering making it paid-up to save some money next year as I am a commission-only earner and am nervous about what 2009 may bring. What would the implications be? Will it still grow over the next 10 years (presuming the economy will be improving by then)?
Ian Beere of Netto Financial Services responds:
I assume the RA has a contract period for another 10 years.
If contributions are stopped now, the money saved to date will remain invested and continue to grow.
However, as you are breaking your commitment to invest R580 per month for another 10 years, you will be charged a penalty to stop the payments.
The penalty should amount to approximately R4 000 (580 x 12 x 10 x 0.06).
Thus, if the current value of the policy is say R50 000, then the day after you cancel the debit order, your value will be R46 000.
The R46 000 will then continue to grow. Depending on the product and time frames, if you re-commence premiums the R4 000 can be added back.
We use unit trust-based retirement annuities. These products are completely flexible in terms of starting and stopping premiums, paying in lump sums and there is never a penalty.
Continuing with an existing RA for as long as you can will result in you having more pension savings when you retire.
However, if you do not have the cash then you have to stop the premium.
Should you re-start it when you are able, the early cancellation fee can be reversed. Remember, though, conditions apply.
If you consider making additional retirement annuity investments, rather opt for a unit trust-based annuity.
When it comes to the amount you expect to get from the investment, remember that the estimated maturity value is just a mathematical formula and should be ignored for the purposes of decision-making.
The more important question is, what fund is the annuity investing in? Is it investing in SA or offshore? In shares, bonds, property or cash? Or maybe a mixture?
This will determine the growth and the maturity value, not the estimate on the policy printout.
Professional financial advice will help you determine the amount of savings you require in today's rands.
If you have not had this evaluated for you, then it is a good New Year's resolution to do so.
- Ian Beere is a partner at Netto Financial Services. Contact him at 021 530 1279.