Is it legal to be penalised for reducing my retirement annuity premium?

Question

Is it good practice/legal for an investment firm to charge a penalty if I request to have my monthly retirement annuity premium reduced?

Answer

Good practice no but legal and the industry standard, yes. If your retirement annuity is based on a policy (i.e most life insurance retirement annuities) then you are bound by the policy "terms and conditions", and you may incur a "penalty" if you break these terms by reducing or stopping your contributions. It is not really a penalty however: your provider incurs upfront costs on your behalf, mainly broker commission. The commission is based on the contributions you are expected to make over the life of your policy. The provider raises a loan account against your retirement annuity, charges interest on it, and then recovers this loan over the life of your retirement annuity. If you lower your contribution or stop making contributions, the provider accelerates the recovery of your loan, which is the "penalty" you incur. If your retirement annuity is not policy-based (a unit-trust type retirement annuity such as the 10X RA) and you do not use a broker, then you would avoid such penalties.