Question:
Hi, I have a retirement annuity with one of the big investment companies in SA. I’m not happy with the retirement annuities' growth and want to move it to another company. Is it this possible and what penalties will I be charged?
Answer:
Phatane,
It depends on the Retirement Annuity Fund rules whether you will be allowed to move your retirement annuity or not. Most retirement annuity funds allow you to move your retirement annuity. As you have taken out an retirement annuity with a life assurance company, chances are you will be quoted a "termination charge" or "penalty". Scarily, this can be as high as 30% of your investment balance. The goal is to deter you from switching. But it is important to understand the true nature of this charge, otherwise it may lead you to make the wrong decision.
"Termination charge" or "termination penalty" are phrases used by the life insurance industry to create the impression that you are being punished for breaking a contractual term of the agreement, and that this penalty could be avoided by staying put. That is wrong. The "termination penalty" is nothing more than an accelerated recovery of upfront costs incurred on your behalf. These costs relate to the sales commission and the life company’s "new business" costs. These expenses are incurred up-front and posted as a liability (debt) against your retirement annuity. This liability initially grows as the life insurance company charges you interest on its loan. The liability reduces by the fees deducted from your investment. The critical point is that these costs are recovered, irrespective of whether you remain invested or transfer to another provider. They are recovered either over the life of the policy or as a "termination penalty" (on a transfer or making your retirement annuity paid-up). For all intents and purposes, these are "sunk costs" that you have already incurred and that you have to pay one way or another.
The amount of the recovery ("termination charge") depends on a number of factors including the agreed term (number of years) of your retirement annuity contributions, the commission rate agreed with your broker, the period you have held the retirement annuity and the interest rate charged by the provider. The longer the contractual term and the higher the commission rate, the higher the recovery is likely to be. The longer you have held the retirement annuity, the greater the amount already recovered by the life company, and the smaller the "termination charge" is likely to be. The interest rate charged depends on the service provider; some are known to charge rates not far off the usury rate.
In the past there was no limit to the amount of the penalty and some investors forfeited their entire investment. The law has now been changed, limiting the recovery to 30% of the investment value. Even better, life assurance retirement annuities sold from 1 January 2009 restrict the penalty to 15% of the investment value on transfer.
