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Why are my RA fees so high?

A Fin24 user wants to know what would be considered to be reasonable fees for the management of a retirement annuity. He writes:

I have noticed that the management fees applicable on my retirement annuity (RA) monthly premium are around 27% of the premium.

Please advise what is reasonable in terms of a percentage.

Nico-Louis Minnie of Liberty, responds:

Management fees on most investments are charged as a percentage of the assets. This means the less you have with the company, the lower the rand amount of the fee.

Similarly, if you have a larger asset base you’ll pay more, although, as a percentage, it is exactly the same.

One of the reasons for this is equity between policyholders. Charging a fixed rand amount would prejudice those with fewer assets and benefit those with large balances.

A natural consequence of this is that you’ll pay more (as a rand amount) over time as your investment grows.

In fact, given enough time, your fees could very well become a large proportion of your contributions.

However, bear in mind that this also means that your investment has grown a lot in value to the extent that your contributions are overshadowed by the growth of your investment.

Therefore, it is important that you look at the actual percentage of fees levied. There are many fee structures out there, but if your total fee is less than 3% you are paying in line with the industry average.

Exactly when your fees will reach a certain percentage of contributions depends on:
 
- The contributions paid;

- Contribution frequency;

- Any escalation in the contributions;

- Withdrawals;

- Fees;

- Investment growth.

Assuming no contribution escalation on monthly contributions and a 10% per year investment growth with a 2% p a management fee, you can expect your management fees to reach 27% of your (monthly) contributions within 15 years, although your personal circumstances may be different.

- Fin24

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