You can be young without money, but you can’t be old without it. Tennesse Williams
Retirement reform, RDR and TCF all speak to better outcomes. Old style, conventional retirement annuities have been singled out as products sold for high commissions – at the expense of customer needs. Do these RAs still have a role, or is the future a unit trust linked RA?
RAs exist for one, and only one, savings goal
RAs are designed and structured as saving vehicles for retirement, and investors expect a decent return at retirement. RAs cannot continue to exist if poor outcomes are experienced by those who buy them, and if those poor outcomes are a result of poor design and high costs.
Not a lot of public love
Conventional RAs of the last century had opaque cost structures, opaque underlying investments; upfront commissions that ate into returns, and very high early termination penalties. The exposé of these in the early 2000s saw a few high powered execs heading to Parliament, which was quite dignified ten years ago.
The result was a Statement of Intent in December 2005, followed in 2006 by a National Treasury discussion paper, which concluded that “several aspects of the traditional intermediated business model followed by life insurers in providing savings products were inappropriate and led to sub-optimal outcomes for consumers.”
A lot has changed
New style RAs came into being with contribution and investment flexibility and no penalties. You could stop and start a premium as life happened and circumstances changed, and choose which unit trusts to invest in. RAs still had tax advantages, and the enforced preservation advantage. Costs came down, and clean pricing was adopted.
New style RAs offered better performance than old-generation RAs, said National Treasury in July 2013, “by a substantial margin.”
Product providers offering conventional RAs introduced their new and improved versions with some contribution flexibility, lower early termination fees, and investment choice and, in some cases, guarantees, loyalty bonuses and smooth bonus policies. (Treasury, however, is not convinced that loyalty bonuses offer real value).
Portability and transferability also improved – but probably still cannot be considered an easy or quick process.
RDR and TCF take the matter further
The RA of the future is the one that meets RDR and TCF requirements, where suitable products are advised on and sold, customers clearly understand products, charges and fees and can compare these. Fees are negotiated and explicitly agreed on and paid by the customer.
A big positive of RAs is the tax advantage. Steven Nathan, CEO of 10X Investments says that this can be quantified. If you save for 40 years the tax advantage is worth about an extra 1% return each year. Just make sure your costs (and/or penalties) don’t wipe out that extra percent.
Are guarantees and smoothing an advantage that conventional RAs can offer? For some they might be.
Tiaan Fourie of Sanlam Personal Finance, product development, notes: “If you have a longer term savings horizon, but you need an incentive to stick to a disciplined savings plan, it might help to consider the loyalty bonuses offered through policy-based RAs.”
It is a struggle to find financial planners in favour of the conventional RA. The unit trust linked RAs just offer better value and choice with lower, transparent costs.
It may also be a mistake to write off companies who offered old style RAs. These are businesses with brand, heritage, distribution reach and some innovative, useful products.
Complex costs don’t belong in the modern market where simple, transparent and cost effective are the big must haves, and where selling is done on the basis of suitable product – not highest commission.
It may not be that relevant to know who offers those RAs, or whether we classify them as conventional, new generation, underwritten or unit trust linked.
What will matter now is how the investor understands them, and their costs, and if they perform to expectation and deliver a better retirement pot.
Patricia Holburn is a freelance writer exploring the ins and outs of money, and the important money questions that affect advisers and consumers.
Readers who wish to comment on this are welcome to email me at firstname.lastname@example.org.