Question:
I am a woman turning 53 year this year. I have a retirement annuity with Sanlam that matures when I turn 55. I have had it for 10 years and it's worth R1.2 million. 4 years ago my broker told me to change it to a new product, a Stratus Retirement Annuity, which I did. Now a new broker tells me I should change it to a Glacier product. It will have a R25 000 penalty + his commission (paid monthly). He says at the moment I am paying 4% in fees per year where the Glacier is 2%. Should I change or wait until I turn 55 and then reassess my existing product? An option is to keep my policy, but change which funds it goes into, which will be at no cost.
Answer:
Gillian,
How would brokers survive, if they could not sell you a new product every few years? Every time they do, they earn more commission. You, as the investor, not only pay the surrender penalty (commission due in respect of your previous retirement annuity not yet recovered from you), but also the commission they earn on the new product. Such product churning is one of the many unsavory industry practices that do enormous harm to investors.
That aside, it would make mathematical sense to switch from the 4% product to the 2% product. At 4%, you are paying an annual fees of R48 000 on R1.2m, whereas at 2%, your annual fee is only R24 000. So you would effectively make up your R25 000 surrender penalty in the first year. Even if you plan to retire at 55, the switch would make sense, all else being equal. You need to make sure that all else is equal.
Paying a fee of 4% pa is scandalous, of course, as the service provider is taking almost your entire real (after-inflation) return. It effectively means that you put up 100% of the capital, you assume 100% of the risk, and your service providers take 80% of the return. That is not a fair deal. Did your old broker really believe that was in your best interest?
If you switch funds in your 4% product, will that bring down your fees? Or do you expect to earn a higher return in another fund? The reality is that none of us know which fund managers will do well in future and who won't. If you switch funds, but still paying the same fee, you are merely speculating.
But you do need to consider your asset allocation. When do you plan to retire and what annuity will you buy? Is your portfolio risk-appropriate for your time horizon? If you plan to buy a conventional annuity within two years, you should now lower your exposure to equities and invest more conservatively.
Of course, you also have other options. The 10X RA, for example, would only cost you around 1% pa (including VAT). So your annual fee would drop from R48 000 to just R12 000. And your asset allocation would automatically be optimised for your age and expected retirement date. It's all very simple, very transparent, and you don't pay a broker fees, or surrender penalties. Feel free to contact Jenna at 021 412 7620 for a no-obligations quote.
