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Gaining control of annuity savings

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A Fin24 user wants to avoid high fees and try to gain control of his retirement products as soon as possible. He writes:

I refer to a question from a 64-year-old who wants to retire, but wants to avoid high fees.

READ: Trying to avoid high fees on retirement products

Several options are explained in the answer. However, I think it avoids the issue of fees except to say that competition has brought them down.

According to my experience, no matter what, the fees on the available products will be too high.

My question therefore is: Once I have drawn a third with a maximum of R500 000 of my capital, I obviously have to purchase one of these products by law with the remainder of the cash.

Question: Can I increase the monthly pay-out to myself to the degree that I get control of it in the shortest time possible?

My reasoning behind this, unfortunately, is a much longer discussion. Thank you.

Johan Gouws, head of investments at Momentum Employee Benefits, responds:

At retirement, members of pension funds and retirement annuity funds need to use at least two-thirds of their accumulated benefits to purchase a post-retirement product (annuity).

These annuities can be classified as either guaranteed annuities or living annuities.

To answer this question, one needs to understand the fee dispensation and how it differs between the two different types of annuities.

Guaranteed annuities

With guaranteed annuities, the investor pays a lump sum premium and receives a guaranteed income for the rest of their lives.

This income can stay level or increase on an annual basis to keep pace with the cost of living (recommended).

The amount of guaranteed income that can be purchased differs from insurer to insurer and also changes on a weekly basis in line with long-term interest rates.

The insurer makes provision for all the anticipated future costs of administering and managing the annuity when calculating the monthly income.

Each insurer has its own cost structure, which needs to be covered in the pricing of the annuity.

Guaranteed annuities can also carry additional costs due to the provision of onerous investment and mortality guarantees.  

However, the high demand for guaranteed annuities has resulted in increased competition between insurers, meaning that there is limited scope for them to load additional fees into the pricing of the annuity.

In order to get the best deal possible, one must compare the following:
 
- How much is the monthly income quoted?

- To keep abreast of inflation, are annual increases factored in, and if so, are they sufficient?
 
Living annuities

With a living annuity product, an individual invests a lump sum and then decides how much income is required on a monthly basis (subject to regulatory limits).

This lump sum is invested based on the person's risk profile, and the investor is entitled to the full investment returns (whether positive or negative).

This means that the benefits (potentially high investment returns) as well as the risks (low/negative investment returns) fall squarely on the investor.

If the funds drawn from the annuity are not properly controlled, the investor runs the risk of running out of capital.

Due to the degree of risk inherent in this product, it is advisable to make use of a qualified financial adviseor to assist in managing this product.

The fees under this product can be broadly categorised as advisory fees, product fees and portfolio management fees.

The advisory fees are payable to an adviser (if one is used) and can be negotiated. The product fees are payable to the provider of the living annuity and the portfolio management fees are payable to the portfolio manager looking after the investments.

Most of the product providers allow investors a choice of portfolio managers who can be selected to manage their investments.

The onus falls on the investor to ensure that the product fees paid are in line with other product providers.

The investor also needs to make sure that the chosen portfolio charges a market-related fee and that there are no unnecessary fee layers.

Investors should ask their advisers to provide a detailed breakdown of the fees levied on the portfolio, and who such fees are paid to.

Armed with this information, the investor can make an informed choice on a living annuity provider and portfolio manager.

Thus, to answer your question, if you opt for a living annuity the maximum amount of annual income that can be taken is 17.5% of your investment balance.

However, be aware of all the various fees mentioned above. Drawing a high monthly income also means that you are exposed to a longevity risk (outliving your funds), so it is important to consider all factors before making an informed decision.

ALSO READ: Why are my RA fees so high?

- Fin24

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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