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Trying to avoid high fees on retirement products

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A Fin24 user is looking for retirement products which would avoid high fees and regulation 28. He writes:

I want to convert preservation fund and retirement annuity (RA) investments into a living annuity.

I am 64 and don't want any of the industry products (high fees and regulation 28).

What are my options?

Wanita Isaacs, investor education manager at Allan Gray, responds:

When retiring from a pension preservation fund or a retirement annuity, you are legally required to buy an income-providing investment product using at least two-thirds of your investment from each fund.

If you are retiring from a provident preservation fund, depending on the rules of the fund, you may be allowed to take your full benefit in cash.

The main options available for this compulsory investment are living annuities and guaranteed annuities, which are offered by a wide range of product providers.

Competition in this space has brought the fees down over time. Although there are still some expensive annuities in the market, there are also a range of annuities that are far more cost effective.

Your choice depends on your preferences.

In its simplest form, a guaranteed life annuity will pay you a pre-determined guaranteed income for as long as you live, effectively insuring you against the risk of living too long.

The rate you receive is influenced by your age and the current interest rate. The older you are and the shorter your life expectancy, the higher the income you’re likely to receive.

The insurer takes ownership of your capital and your beneficiaries have no claim to it when you die, unless you’re prepared to receive a lower income by adding an initial guarantee period to your annuity.

Guaranteed annuities remove the risk of selecting inappropriate investment choices and protect you from drawing too much of your capital in the early years as well as insuring you against living too long.

Living annuities, on the other hand, allow you to control your underlying investments and your income level (within the legal limits).

They allow you to take less income now, so that your capital can grow and fund more income later in life, and leave capital behind for others.

However, with flexibility comes risk, in particular market risk and longevity risk. If you go the living annuity route you need to make sure there is no disconnect between your expectations, the way you construct your portfolios and the amount of income you draw down.

As it stands, living annuities are not subject to regulation 28 investment limits.

This means you have greater investment freedom. That said, if you choose this investment option, careful asset allocation is essential for ensuring that your retirement capital can provide you with an income for life and the Regulation 28 limits are a useful guideline.

If you take any of your retirement capital in cash, you can invest this lump sum in a range of products including, but not limited to, unit trusts, annuities or direct investments in, for example, shares.

You can then withdraw from these investments for your income during retirement.

When investing in these products, it is equally important to ensure that your income will be sustainable, both in terms of your asset allocation and your income level.

An independent financial adviser can help you weigh up your options and plan your investment portfolio and your income level.

Since these investment decisions will determine your financial wellbeing for your retirement, getting advice can help you be sure you’re making the right decisions.

- Fin24

Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.

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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