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Question
I recently joined a company that has a group retirement annuity scheme. We all have our own retirement annuities, and the company pays the premiums, with half of it coming off our income as a salary sacrifice.
I read a recent article of yours where you told us to look at the costs of investments. I have listed the costs below:
These seem high and, in addition, I see the broker is taking a fee of R69 every month when my R2,400 premium is paid. He also receives an upfront fee of R6,290.
Answer
A group retirement annuity is ideal for small businesses. It is a convenient and tax-efficient way to ensure that employees have a retirement fund.
The compelling feature of a group retirement annuity is its flexibility. Each employee has his or her own investment and can invest in a wide range of portfolios. When they leave the company, employees can continue paying the premiums themselves and have the policy continue. They can also stop paying the premiums and leave it paid up until they retire.
Now, before we get into the costs, I would like to highlight a few structural issues of the investment that was proposed to you:
Upfront fees
A big red light comes on when I see that there is an upfront fee being charged. As soon as an upfront fee is charged, the flexibility of the product is compromised. You could find yourself in a situation where penalties are levied on the investment if you stop paying the premiums.
When brokers want upfront fees, they will typically use a retirement age of 65 instead of the more sensible 55 because this will give them a much better commission. Even if the company’s retirement age is 65, as you are taking out this policy in your own name, I would recommend that you use the age of 55 for the contract.
Fees
This investment does seem to have many layers of costs. The R69 fee on each premium works out to 2.62%. When we add this to the costs levied by the insurance company, you get a cost of 7.98%. All these costs will have VAT added to them, so the true cost works out to 9.2%.
This means that your investment must return more than 9.2% just to break even.
But wait, it gets worse. There is that upfront fee of R6,290 that must be recouped. This is more than two-and-a-half months’ worth of contribution. I can’t see this investment breaking even after two years.
I would recommend that you talk to the company’s financial adviser and ask him or her the following: in the first year, how much of your R2,400 monthly premium will be allocated to the investment once all the costs have been deducted?
Read more in Daily Maverick: The choice between a living annuity and a guaranteed life annuity
And, what would happen if you left the company and stopped paying the premiums for an extended period?
Group retirement annuities are great, but I would certainly recommend that the company uses a structure with a financial adviser being paid on an as-and-when basis.
The typical fee that is used is a 1% upfront fee when the premium is paid, and a 0.5% annual fee on the portfolio.
I far prefer the new-generation approach because it encourages the adviser to ensure that you are invested in the most appropriate portfolio. DM
Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to kenny.meiring@sfpadvice.co.za.
This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.
