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5 things you may not want to hear about your RA (Part 2)

11 November 2015, 11:19Charné van der Walt

You've seen five things you should know about Retirement Annuities, here are five things you do NOT want to hear about your RA:

1. You may lose part of what you saved up if you stop or reduce premiums or retire earlier.

If you have to retire earlier than the retirement date or you need to stop (or reduce) the monthly premium before the retirement date due to unforeseen circumstances, you can lose part of the money you’ve saved up. Be aware of the following:

a.    You don’t physically pay a penalty, it is simply deducted from the value of the policy at that time.  

b.    Not all companies charge these penalties but they may charge a small administration fee if you make changes to the policy. Some companies may also only charge you penalties in the first few years of the policy and not after that.  

c.    If the penalty is more than the value of the RA, the RA can be cancelled, which can sometimes happen with very young RA’s. Find out from the company you have chosen to take out your RA with, what their rules are in this regard and where necessary and request a quote.

d.    Work through and understand quotes before you accept and sign it.

2. You need to know how you will receive your money when you retire.

Unless the amount available on the RA at retirement is under a certain minimum, you cannot take the full amount in cash when you retire. With current legislation, it can be paid to you in one of two ways:

a.    You take one third in cash and you use the rest to provide you with a monthly income; or

b.    You don’t take one third cash but use the full investment value to provide you with a monthly income.  How much the monthly income payments will be, will be determined by various factors. When you earn a monthly income, you can, for example choose between two types of monthly income:

i.    traditional annuity, which is a guaranteed income that will pay out for the rest of your life (but you will not have access to the original investment anymore); or

ii.    a living annuity, where you draw an income until the investment value is used up.

3. You must be part of the decision making process even if you use a broker.

Here are some tips when you want to be part of the decision making process:

a.    Before your broker gives you any advice, he/she must ask you to complete a Risk Profile Analysis which is a compulsory questionnaire. It determines how much risk you are willing and able to take as an investor. More about this in part 3 of the series.

b.    If you don’t feel comfortable with a broker, then see a second or third one before you make your final decision. Try and commit to one broker in the end and set up a long term relationship with him/her. Do not fall for flattery to sign forms and also do not let the broker make you feel guilty if you did not sign the forms with your first appointment. Stay with someone who can explain things in a way you can understand.

c.    It is your right to make sure of information, understand the Risk Profile Analysis you completed and to do research first in your own time to understand what you are committing to.

d.    Take this article to your appointment and make sure you are happy with (for example) the retirement age the broker has suggested and also how the premium will grow each year. Once you’re satisfied with the information, don’t delay and start saving as soon as you can.

4. You need to know what makes the RA perform (and what not).

There are (very broadly speaking) two things that influence the performance of your RA. And they are:

a.    What “underlying funds” your money is invested in.

b.    Costs.  

“Underlying funds” simply means that your money is channelled via the RA into some kind of fund of which you can track the growth of. Some of these funds will grow more over longer terms but it could sometimes look if they don’t perform well over shorter periods. Other funds will be safer but offer less growth. Choosing these funds will greatly be determined by the result of your Risk Profile Analysis and the advice you receive from your broker.  

Costs include:

a.    the costs the company charges to manage your investment (which you can rarely change);

b.    costs of the underlying funds, which varies; and

c.    broker commission.

The broker is legally bound to declare these costs to you as the investor. These costs will influence the performance of your investment. To put it very simply, if the fund you chose grows with 12% and the costs on that fund was 2% and your broker’s commission 1%, then you will get 9% growth.

5. You have a tax benefit on the premiums you pay.

If you earn a salary per month from which tax is deducted, the RA may lead to a tax refund. You can claim this refund in one of two ways:

a.    You ask your employer to take into account your monthly RA premium payment so that your employer can deduct less tax each month (and you earn more each month); or

b.    You pay normal tax every month but then submit your annual tax return to receive your refund.

Lastly: Always make sure you understand the product, know other savings options and that you are comfortable before signing any policy application forms.

Part 4 is where I will tell you about Investment Risk, what it is and what it means to you, the investor.

- Woman24


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