Question:
At present I have a retirement annuity with your competitor. Your costs are clearly stated, but what is the annual growth that can be expected on the 10X RA? I am considering transferring. I am over 55 and this is a discretionary saving.
Answer:
Andy,
We cannot forecast future investment returns as future investment returns are unknown. For this reason, every fund manager will have a disclaimer on their investment reports, stating that past performance does not guarantee future performance.
The investor's future investment returns depends almost entirely on two factors: their asset allocation and the fees they pay. Equities have historically posted the highest long-term returns (CPI +7% on average) but the short term return is very unpredictable. Over the past 100 years, the SA share market doubled in its best year, and halved in its worst. But as the investment term lengthens, so the range of outcomes and the volatility of returns decreases.
The return from cash and bonds is more predictable (less volatile), but it also tends to be bit lower (CPI + 1%-2%).
If your stated retirement date is more than nine years from retirement, you will be invested in our High-Equity portfolio, which holds around 75% in equities, and the balance in bonds and cash. This portfolio promises the highest long-term returns, but also the greatest short-term volatility. We estimate the long-term return on this portfolio at CPI +5%, but we cannot predict the return over any specific period. Over the past five years, this portfolio has delivered an annual return of CPI +10.3%, which is well above historical norms and we do not believe such high returns are sustainable.
In terms of the default glide path of our life-stage model, if you are less than ten years from retirement, you will gradually shift to lower-risk (but less volatile) portfolios that would likely deliver a lower long-term return. You can however opt out of this glide path and remain in the High-Equity portfolio if you choose.
You have mentioned fees you will be charged per our sliding fee scale. The critical impact of fees in the context of an expected long-term return of CPI +5% is self-evident. The average RA fee in SA is around 2.5% pa, which equates to 50% of the after-inflation return. After 40 years, investors who pay such high fees will have 40-50%% less money in retirement.
These forecasts do not constitute a guarantee in any way. We recommend you visit our Retirement Calculator to assist you with your long-term retirement planning.
