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Why new RA laws should grab your attention

An expert explains what the new retirement annuity legislation means for the person in the street.

Just as those of us who work in financial services don’t know about the latest developments in other professional spheres, those of you in other professions can’t always expect to be aware of all the regulatory and legislative changes that could affect your savings and retirement plans. However it is crucial that you are aware of all these developments that will affect your longest term savings – those assets that you have been diligently setting aside for your retirement years.

It’s been a couple of years since the Pension Funds Adjudicator catapulted retirement annuities and related issues into the limelight. Only now, however, is the resultant legislation being introduced. These changes have not commanded headline status in the broadsheets; yet their combined impact will have a profound effect on your own personal retirement wealth.

What are these changes and how will they affect us all as members of retirement annuity funds?

Freedom of choice for investors – in the past, members of many retirement annuity funds were prevented from transferring to another fund by prescriptive fund rules. Rather like the cell phone industry, ‘portability’ has now been legislated and all such limiting rules have been replaced to allow members to transfer to more appropriate funds if they want to.

Advice on retirement annuities is readily available again – the advent of the new generation of retirement annuity products has presented an entirely different value proposition compared to the old products of years gone by that many of us are still invested in. We should all assess whether it is financially appropriate to transfer legacy assets into the new generation products as there are significant cost and flexibility benefits in doing so – but this assessment often requires the assistance of a qualified intermediary. Puzzlingly, legislation prevented your financial advisor from earning a fee from you for work done on transferring a retirement annuity fund. This barrier has thankfully been removed and financial advisors can now earn a fee to assess investor’s options in this regard, which is fully justifiable. After all, not even the most benevolent professional is going to allocate valuable time on a pro-bono basis all of the time.

Clarity on improved termination values on transferred retirement annuities – for many would-be transferors of retirement annuities, the punitive penalties that life insurers apply on so-called early terminations have been an understandable retardant to transfers. This is arguably the sole potential reason for not transferring from a legacy fund to one of the new generation funds. Recent legislation provides welcome clarity on the maximum levels that insurers are permitted to withhold from transferring members. For transfers of policies initiated after 1 January 2009 the maximum penalty will be 15% of the fund value, whilst for older policies the maximum penalty that can be applied would be 30% – it’s important to note however that these are maximum levels and that over time these penalties reduce. So an essential step in the analysis of the merits of transferring will be to ascertain from the insurers what level of penalty will be applied to your individual case.

The returns on your investments over time will ultimately be determined by 2 factors; the investment return and the charges levied against your investment. The level of investment return you experience (once you have chosen your appropriate asset class exposure) is largely beyond your control, unless you make the mistake of trying to time the market. You’re time is much better spent paying attention to the costs and charges levied against your investment i.e. securing the best value investment offering available.

PPS Investments, as the investment business that is actually owned by all of the members of PPS offers exceptionally priced investment products with the added benefit of ownership – a unique proposition in South Africa.

Nick Battersby, CEO of PPS Investments

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COMMENTS   12

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Who are they kidding? “You can transfer your funds but it will cost you 15% to 30% of your capital!” Please explain how the new legislation helps the policy holder rather than the insurance industry. Another reason not to touch RAs!

The new legislation caps the penalty which retirement funds used to apply. It could be less than 15% – get a quote before making any decisions.

This is great news, especially for youngish members of RAF, who pre-new legislation would have faced another 30 years of exorbitant administration fees eating away their RA returns. Now at least they have the option to get out of those punitive contracts and opt for the lower cost, more transparent new-generation products. Short-term sacrifice for long-term rewards.

These legislative changes won’t affect me. I’m not planing to ever squirrel my cash away in a losing proposition again.

There are 2 major drawbacks to these RA investment ‘vehicles’.

1) the legislation itself. It’s controlled by the government of the day and can be changed to suit them at any time. It’s pre-tax money after all, so they MUST have 100% direction over it at all times and stuff you.

2) Admin costs, commissions and ‘maximum penalties’ (15%?? get real!!) imposed by the fund administrators. Most of which are coporate drones just pulling a salary and don’t care a fig about your future welfare.

Oh and a third point…

3) These RA organisations and Fund Admins are as clueless as the rest of us as to the future. Witness the trainsmash about to happen in the USA with their 401k plans. Best educate yourself and make your own decisions.

NO. best give the taxmen his cut and then you’re free to move your money around as you se fit. To max out on gains, or preserve your capital, or minimise losses (as in times like these).

Safe as an RA?
NAAAAAH
“safe as houses”
Invest yor money in property, let your tenants buy your “retirement annuity” and leave the assets to your kids (less tax).
Why in Erope do they call asmall block of rental apartments a “pensione”?
Because it is one……………inflation proof too!

Of course it is “hard work” and most people are too lazy to go for this option.

allowed to build up qualifying retirement assets without stupid instituions and stupid penalties and stupid fees masquerading as advice. Is it perhaps that captured retirement funds are a soft target for the ANC government or their financial institutions ( cash cows). This is another losing proposition tempting you with tax shelters that do not shelter you from real economic risks and, whats more, creating a product that adds risks of its very own. The ANC controlled government is not a freedom fighter but a highwayman in freedom fighers clothing.

I admire your independence and chutzpah, but you’re not entirely correct on RA’s.

A tax saving of 40pc is not to be sneezed at! Its very substantial. Only after tax money counts, never pre-tax. Actually, in todays world, one can get both the tax benefit and a wide choice of investment vehicles. Plus you can transfer from one asset class to another at virtually no cost! I know because I recently did it. Given the flexibility now available to RA holders, both during your working life, and thereafter in terms of retirement income investing, it makes sense to use your tax-free allowance in RA’s. Unless you’re a stock market whiz, which by far the majority are not and never will be. RA holders need worry only about 2 things. Government action and costs. However, crass though govt may be, even they dont indulge in retrospective legislation, so you can always change if needs be. Costs you determine from the investment people. You cant control them, but you can know them. Of course, its good to have non-RA investments too. Diversification, plus the 15pc limit. Probably you should have 55-60pc non-RA and 45-40pc RA. Its because there are restrictions on the RA lump sum you can withdraw, mainly of the tax kind. But yes, RA’s have a place.

Buying an RA is a good idea … unless you want to spend your money now or before retirement, or don’t have discipline to save for retirement. Yes retirement – not for those credit bills due last week cos you’ve overspent again. Not for tomorrow or next month. The best part is that Mr taxman is being willing to be your friend here and save you some tax.

Be cynical at your own expense. Mr taxman wiill be smiling :~)

The RA benefit is often proposed but why is it that nobody mentions the locked in effect when the investor wishes to emigrate? I have seen many individuals demanding a refund at the customer services counter. Their advisor never explained that there is no early payout of RA funds before age 55, exceptional circumstances excl. And why would the advisor inform them when the deal could be lost? What with our youth heading for the chicken run in droves I suggest that they rather bypass the RA and choose a more liquid vehicle.

1) You most certainly can transfer/cash out your RA on emigration

2) Why do you want to access your retirement funding BEFORE retirement?Could it perhaps be that you have no sense of financial management that you call on savings & investments to bail you out of your debt-induced state of stupidity???

Dont touch anything that ties your money up. Spend a few hours learning how to invest in equities and do it yourself. Tired of having so called investment advisors making a mint out of the working class!!

Given (a) you want to save some money specifically for retirement, and (b) you don’t mind the state contributing to that saving at your current tax rate, and (c) you understand that an RA can be invested in something with exposure to equities (the only long-term means to beat inflation), then RAs are and excellent choice.

The key advantage over other alternatives is the compounded growth on the tax saving over the long term.

Fees are only significant in the short term, and most financial services providers allow you to change the underlying fund of the RA quite easily, so there is more flexibility than it might seem at first.

“Puzzlingly, legislation prevented your financial advisor from earning a fee from you for work done on transferring a retirement annuity fund” The FS industry here has been a rip-off for ages, the stellar years of great performance are over and charging more to try and get their personal income back up is ludicrious. There is a growing wisening up to these vices so wealth managers and co.’s tread carefully, it might be legal but it is starting to P*** investors off!

End of comments.

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