We all understand the significant impact even a small percentage can have, don’t we? That’s why switching your retirement annuity provider could be a savvy decision, especially if your current provider’s fees are gnawing away at your savings.
The Burden of Legacy Annuities
Before delving into the details of transferring your annuity, it’s vital to understand the penalties, particularly those linked to legacy annuities’ sky-high fees. If your annuity was issued before 2005, it’s considered a legacy annuity. There are life insurers out there who charge steep "termination charges" or "penalties" if you stop regular contributions or decide to transfer. These can range anywhere from 0% to a whopping 30% of your investment balance and often encompass administrative fees along with initial commission recoveries.
Factors That Affect Penalties
There are several elements influencing the penalty rate, such as:
Your Age: Younger policyholders might encounter heftier penalties because of their lengthy investment horizon.
Policy Term: Those with shorter-term policies may see lesser penalties.
However, there’s some good news on this front! Recently, there have been encouraging changes aimed at cutting down these daunting penalties. For products sold after 2009, the maximum penalty has been capped at 15%, and currently, it stands at 10%, with plans to lower it further to 5%. These updates allow investors the freedom to shift their legacy RA funds to more economical, higher-performing portfolios.
Evaluating Your Current Provider
If you’re contemplating a change, start by evaluating your current provider’s performance through an EAC (Effective Annual Cost) and an IRR (Internal Rate of Return) statement. The EAC will offer a clear fee breakdown, while the IRR highlights your actual returns post-fees. Ideally, your IRR should outpace inflation.
Looking Into Potential Providers
When considering new providers, ask for their EAC and fund fact sheets.
EAC: Aim for an EAC between 1% – 2% per annum—the lower, the better!
Returns: Examine the fund’s historical returns, ensuring they match your risk tolerance.
The Process of Transferring
Once you’ve made up your mind, here’s how the transfer usually unfolds:
- Kick-off the Transfer: Reach out to your current provider and get a Section 14 Quote.
- Prepare the Documents: You’ll need to gather some essential paperwork and obtain a tax directive from SARS to ensure everything remains tax-neutral.
- Seek Professional Guidance: Consulting a financial advisor can be invaluable as they can help you navigate the complexities of this transition and guide you in making informed decisions.
Retiring With Confidence
Saving up for retirement is probably the biggest financial endeavor many of us will ever undertake. Unfortunately, it can often feel overwhelmingly complicated. In Carina Jooste’s monthly blog, she demystifies retirement queries, tackling everything from selecting the right products for various situations to effective tax strategies.
