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What happens when I default on my RA payments?

Q:
I've been contributing for 10 years, but haven't been able to pay the last three months.

I have been paying towards a retirement annuity policy for around 10 years and have reached a situation in the past three months where I am unable to meet my monthly payments. I am extremely worried that I will not be able to continue to maintain this policy. Please advise as to what happens to this RA policy now that I have not paid my monthly premiums for three months, and what are my options?

  

Please note that the information provided below does not constitute financial advice. Generic information has been applied in the context of your question. We have very limited detail about you and your circumstances, such detail may impact any advice provided.  

I’m sorry to hear that you are unable to make your retirement annuity payments. Your options are relatively straightforward in that you could either stop or decrease your premium – the implications, however, could be a little trickier and are detailed below.

The type of retirement annuity you have will determine the implications of revising your premium downwards. There are broadly two types of retirement annuities:

  1. LISP retirement annuity
  2. Life retirement annuity

A LISP (linked investment services provider) retirement annuity is a unit trust based retirement annuity offered via a linked platform, whereas a life retirement annuity is offered via a business operating under a life licence. LISP retirement annuities are very straightforward in that you can increase, decrease or stop your premium at any time without penalty as well as amend (increase, decrease, stop) any pre-determined annual premium increases – again without any penalty.  

With regards to premiums, the flexibility of a LISP-based retirement annuity is largely driven by the fee structure where the fees (advisor, platform and fund manager) are based on current, and not projected, investment values. The fee structure in a life retirement annuity differs in that the financial advisor is typically remunerated based on your future premiums.

If at inception you commit to, for example, a 40-year term with a 10% premium escalation, the advisor is paid upfront on these assumptions. If you then reduce or stop your premium, a penalty is almost always applied to your investment value to reimburse the issuer for commissions that were paid upfront to the advisor (which were based on future premiums and future investment value).

My view is that the fee structure in a life retirement annuity is unfairly prejudicial to investors. I’m quite certain most people do not willingly choose to decrease their premiums, thus impacting their retirement pool of assets. 

With both types of retirement annuities, your remaining lump sum investment value will continue to grow in line with the underlying investment choices – even if you stop the debit orders. A reminder that your investment choice/s can be altered at any time, although the availability of funds and/or stockbrokers will depend on the retirement annuity provider.    

Another possible implication that could be related to stopping the premium in your retirement annuity is where you have a life policy or other benefits that are linked to your retirement annuity premium.

We propose that you use this opportunity to not only understand the implication of stopping or reducing your premium but also to assess your investment choice, the fee structure on your investment, and the range of investment choice.

I wish you the best of luck and hope there will be no adverse consequences to you in stopping your premiums.    

  

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