Retirement annuity is not a dirty word

Cape Town - Retirement Annuities (RAs) are somewhat of a dirty word among many South African retail investors. Sadly they are often seen as ineffective savings vehicles that have provided very little return to a large proportion of investors even after years of contributions.

However, Jeanette Marais, Director of Distribution and Client Services at Allan Gray, says this is largely due to the poor historic cost structures that accompanied old life insurance-based RA policies. RAs were traditionally rolled out by life insurance brokers whose fee structures allowed them to charge a commission upfront for the full life-time of the annuity, which was arbitrarily set at 27 years.

This meant that if you contributed R1 000 per month to an RA and the broker charged a 2.5% commission that was payable upfront, you essentially had a R8 100 liability (R1 000 per month x 12 months x 2.5% commission x 27 year maximum policy term = R8 100) created against your contributions before you’d paid your first rand.