You could wreck your retirement with the wrong Retirement Annuity

Planning for retirement is one of the most crucial financial decisions you’ll make – so you definitely don’t want to get it wrong. A key part of this process involves choosing the right retirement annuity (RA) to ensure long-term financial security. Traditionally, assurance-based RAs sold by large insurance providers have been the standard choice, but in recent years, unit trust-based RAs have gained popularity due to their flexibility and much lower cost. Did you know that paying 1% less in fees can mean up to 30% more money in retirement?

You owe it to yourself to make sure you’re invested in the best product for the retirement you want. So let’s start by talking about the structure and investment approach of the two kinds of RA mentioned above.

Traditional Assurance-Based RAs: These are typically managed by life insurance companies and function similarly to an insurance policy. You enter a long-term contract and frequently incur obligations for decades into the future, specifying how much you must save and for how long.

Unit Trust-Based RAs: These allow you to invest directly in a range of unit trusts, giving you more control over asset allocation within the parameters of Regulation 28 of the Pension Funds Act. This means you can achieve greater diversification in your portfolio at a fraction of the cost. Low-cost index-based balanced funds are a very efficient way to achieve these goals whilst accounting for your unique time horizon, risk appetite and prevailing market conditions.

Secondly, let’s have a look at the differences in flexibility between the two products:

Assurance-Based RAs: Tend to be quite restrictive to the changing needs of clients. If you break the contract terms (for example, because you have lost your job and can longer afford the contributions, or you wish to move your RA to another provider), traditional providers can (and often do) accelerate the recovery of this debt. This recovery is called a ‘termination penalty’ and it can cost you up to 30% of your investment (now limited to 15% if you took out the RA after 1 January 2009).

Unit Trust-Based RAs: These typically have much greater flexibility to your changing needs. You can make once-off or regular contributions whilst also being able to change your contributions as your needs evolve. You can switch providers without additional penalties, and you have a lot of choice as to the underlying funds and assets into which your money is invested.

Lastly, let’s discuss the fees and cost structure of the two retirement annuity products.

Assurance-Based RAs: These often come with higher costs, including administrative fees, policy fees, and sometimes penalties for early withdrawal or changes to contributions.

Unit Trust-Based RAs: Generally, these have a more transparent fee structure, with costs primarily based on the underlying fund’s management fees. There are typically no hidden fees or penalties for changes, making them a cost-effective option over the long term. Also, if your provider uses an index-tracking methodology, you won’t be paying for expensive research and investment teams, which can increase overhead for the provider.

Saving for retirement shouldn’t be a difficult or fraught process, and you don’t need to be a financial advisor to understand what’s good for you. Compare costs and the performance of the funds in which you are invested. Then use a calculator to figure out if you’re going to get to where you need to be when you retire. Finally, get a free comparison report, or speak to an experienced investment consultant to make sure you have all your facts straight (also free!). Your investments should be working for you. You shouldn’t be working for your RA provider!