Keeping rising RA costs at bay

2012-05-07 07:42

THERE's some sobering news if you are planning for your retirement and have invested in a retirement annuity.

Falling bond yields, increasing longevity and higher expected inflation have forced life insurers to hike annuity rates, making retirement expensive, according to a Cape Town-based fund manager.

Johan Kriek of Coronation Fund Managers says increases in annuity rates are not confined to guaranteed annuities offered by life insurers, but also indirectly feed through to living annuities.

Guaranteed annuities make payments for a minimum period even if the member dies during that period. Living annuities allow members to make systematic withdrawals from the policy, without converting the annuity to a stream of income payments.

"Sustainable levels of drawdowns from living annuities are falling as pensioners live longer and earn less investment income, particularly in post-retirement strategies where a significant proportion of the assets should be invested in lower-risk portfolios," says Kriek.

"It is worrying that, despite the recent market uplift, the situation has remained as precarious." 

But, says Kriek, there are various options available to retirement annuity members that could go some way to rectifying the situation.

"We summarise these as 'saving more, for longer, in the right product, with the right manager'.

"Unfortunately not all of the available options will be easy or comfortable to adopt, particularly where retirement funding contributions are increased," he says.

Making the most of your options

Saving more is the most obvious way in which the increased cost of your retirement could be met, says Kriek.

"But given an environment where food and energy prices are rising and increasingly taking their toll on disposable incomes, it is difficult to envisage members being willing (or even able) to increase retirement fund contributions."

Saving for longer is also not a popular option, especially where it means postponing retirement by a number of years.

But it is a very effective way of making up any shortfall as more contributions are made, accumulated balances earn investment returns for a longer period and the post-retirement period is shortened.

"A second way to increase the period is by starting to provide for retirement earlier; unfortunately this option is only available to younger members," he said, adding being "in the right product", according to your ability to take investment risk, is essential.

He says as a rule of thumb, younger members have a higher risk tolerance as the period to retirement is expected to be long enough to cover entire market cycles.

In addition, the expected future contributions from younger members form a significant part of the eventual retirement lump sum, so the volatility of the combined retirement provision (savings accumulated to date plus expected future contributions) is much lower.

 - Fin24 

  • Shaun - 2012-05-07 08:36

    How ironic....Coronation (who are managers with an attractive track record)charge some of the highest asset manager fees in the market. Their "solution" to rising costs are to place the burden on the investor - super convenient!

      Jamie - 2012-05-07 09:06

      You pay for what you get. It costs money to run an asset management firm as it does any other business, you have salaries, performance bonuses (to attract the best), advertising, rent, electricity etc. The asset management fees are not necessarily the problem, when you take into consideration that you are paying for their expertise in generating returns. I believe people should be looking at some of the other costs that are involved. Broker fees are presently restricted to 5% of contributions, this is quite high and can be negotiated, however you must bear in mind you are again paying for advice as to which asset managers and specific funds are suitable for your objectives and a certain level of expertise comes into the equation again. The management fees are fees that the provider of the retirement annuity charge, they usually cover things like the distribution of contributions to the relevant asset manager as well sending out statements. You can pay anything up to 3% of the value of your investment on an annual basis (i.e. if you have R1m in your RA it would cost you R30,000p/a). There are certain providers where you can pay 0% for this which is quite a substantial discount, and most platforms have sliding scales based on the amount you have invested with them (though this is not a preference of mine as I feel it penalises the wrong people) Education is the key if you understand what you are buying and how the costs work you can improve you returns substantially.

      Harold - 2012-05-07 13:47

      @Jannie Why should the fee be 5% or is it because both 5 and % are on the same key of the computer. Why should it not be a fixed fee after all management costs are normally fixed thats why asset managers budget at the beginning of the year.

      Jamie - 2012-05-07 16:19

      Hi Harold, Sorry i think you may have misunderstood, the 5% is the broker commission and is the maximum prescribed by law. You do not have to accept that. I am a broker and the maximum initial fee that i take is 2%. It all depends on the financial advisor you are dealing with and their practice philosophy. Regards Jamie

  • Harold - 2012-05-07 13:10

    Fund managers need to start taking less of the investers money for their own pocket very few of them are outstanding. When the market was good they creamed it and now that things are tough they still want it easy. I think it is time that they are investigated by the authorities. The products they offer are all win-lose. With the investor taking the loss. Comeon ombudsman do your job.

  • Harold - 2012-05-07 13:46

    So this sounds like "Be Preared to pay more for less. Yes we know it will hurt but, you cant expect us to feel any pain. Thats is an investors responsibility to feel the pinch" And twenty years down the line these guys will come up with some story why you invested so much and are getting so little.

  • Palu - 2012-05-07 16:43

    feel free to take a look at the bonuses paid to coronation's directors.

  • kevinjane.bannister - 2012-11-15 13:21

    I started RA's at 22 and all looked good 15 years ago. Now that I am only 5 years away from retirement all of a sudden the policies are now not worth what was promised. I still have the printouts. !!!! I was told that the policy values are JSE linked .... Well the JSE has risen 10000 points and my policies only climbed by 3%? I think too much profit from insurance companies is paid to managers and as commissions to agents. IF I had invested my RA in houses from the age of 22 I would have 4 times the proposed payouts for my RA’s. This includes the tax benefits.

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