Should I switch my Retirement Annuity?

A retirement annuity is a tax-efficient savings tool that should help you achieve a comfortable retirement. However many South African’s fall short of their retirement goals primarily due to two factors: High fees and low returns. Often the problem is compounded by poor performing fund managers who charge penalties in the event of a client deciding to switch.

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If you are uncertain of how to go about assessing whether your fund manager is giving you the best possible shot at retirement success, here are the important questions you need to ask them, and why:

1. Is my RA traditional or new generation?

Traditional RA’s involve the investor purchasing a policy with an insurance company. The “new generation” unit-trust based RA’s are investment linked. In both cases, the earliest an investor can access the RA is at age 55.

Why this is important:
For two reasons: flexibility and costs. Traditional RAs are generally inflexible. They tie you into a long-term contract with fixed rules that specify how much you must save and for how long. On selling the policy the broker is paid a sizeable upfront commission based on the value of the premiums the client has contracted to pay. If the client wishes to prematurely cancel his RA, maybe due to high fees, poor performance or an inability to continue to pay the premiums, he is charged a penalty which is then deducted from his accumulated investments. Policy RA’s are notorious for their distinct lack of transparency, particularly around costs.

To the contrary, new generation RA’s don’t have these issues. You are not locked in to a provider and can transfer your RA to another provider, lower your contributions and may have the option to take an indefinite “contribution holiday” at any time – no charges or penalties.

The 10X RA is a new generation RA, that comes with a convenient online portal to make amending your contributions simple and easy. We always charge less than 1% in total fees (excl. VAT), and our reporting is clear and transparent

2. Am I being forced to pay for advice?

Traditional RAs are usually sold through a broker. Even if you buy direct, you may be “allocated” a financial adviser. Their commission ultimately depends on the terms you have agreed to, and the higher your contribution, your escalation rate, the fund fees, and the investment term; the heftier your broker’s commission.

Why this is important:
This incentive may tempt intermediaries to maximise their commission rather than your return, and could cost you up to 0,75% pa. This may not seem like a lot, but over a 40-year savings period it makes quite a dent to the size of your retirement pot!

Again, you can avoid this with a new generation RA. Here, you can invest directly with the asset manager of your choice. Your advisor can still be paid out of your savings, but only on your instruction and at your discretion.

At 10X we make investing simple. No need for a broker, advisor, or any of the associated costs. All our advice is built into our product for you, meaning more for you in the end.

3. Are my fees too high?

Fees are an important consideration when choosing your RA. Over and above an advisory fee, you may incur administration and investment management charges, platform fees and switching costs. Ideally, you should pay less than 1% pa for all these services combined.

Why is this important?

Fees have a dramatic long-term impact on your investment. Fees of just 3% pa (which is the average that South Africans pay) add up over time. By paying just 2% pa less in fees over a forty year investing period you can retire with up to 60% more.

At 10X, we never charge you more than 1% in total fees (Excl VAT).

4. What investment style does my provider use?

There are two investment styles: active management and passive management (also known as Index tracking). With an index fund you typically secure the average market return of the index you are replicating. With an actively managed fund your fund manager moves your money around in an attempt to beat the average market return.

Why is this important?

With an index fund you secure the average market return and avoid the risk of choosing a poorly-performing fund. Index funds also tend to be much cheaper than actively-managed funds.

There is of course the chance that you could do better with an actively-managed fund, but the odds are against you: Only 1 in 4 actively managed funds beat the index, and those that do rarely repeat their success. Remember: no one can reliably predict how funds will perform.

At 10X we don’t believe in gambling with your life’s savings. We track the index, positioning you for better long-term outcomes.

5. Is my asset mix appropriate?

Your asset mix should match for your investment term. For example, as a long-term investor (investing for periods longer than 5 years) you should invest in a high equity portfolio as this historically delivers the highest long-term returns with similar or lower risk than medium or low equity portfolios.

Why is this important?

Once your time horizon shortens to less than five years, you need to take a more conservative approach. Opt for a low equity portfolio and invest in bonds and cash instead. You return will be lower, but your capital more secure. Alternatively, choose a life-stage fund that adjusts your asset mix to your investment time horizon.

At 10X we automatically adjust your asset mix to your investment term, making sure you are appropriately invested every step of the way.

6. Is my service provider transparent?

The above are all important considerations. The question is, has your service provider brought them to your attention? Have they pointed out your long-term obligations, your potential “penalty” charges, or the impact of fees? Have they explained the different investments styles? All relationships require an element of trust, and, if your provider is not upfront on these points, then they may not be your ideal partner.

Transparency is one of the key 10X values. We will always let you know exactly what you paying, where you are, and what this means for you. No smoke, no mirrors, no fine print (at least not the sneaky kind).

Bottom line: when you choose an RA, ask yourself: does this design serve my needs, or does it serve the needs of my service provider? Remember, you take all the risk, so don’t let others walk away with the rewards.

Final Thought: If you are trying to decide if switching is right for you in the context of the penalties your current provider is threatening to charge you, then get in touch with a 10X consultant today. Ultimately the decision to switch providers should take into account the long term gains you stand to achieve by paying lower fees and potentially getting a better return.

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