New retirement annuity policy incentivises investing throughout your working life, writes Maya Fisher-French
To deal with the issue of early termination fees, Sanlam recently launched a new retirement annuity policy called Cumulus Echo Retirement Annuity.
This product encourages people to keep contributing to their retirement annuity (RA) by providing an investment bonus depending on how many years you have held the investment.
For example, a client who starts contributing at age 20 will receive an Echo Bonus at retirement age equal to 110% of the fund value of their investment.
This is equivalent to an additional R110 contribution to the same investment portfolio for every R100 the client contributes over the full term of the product. Where a client contributes R1 000 a month and funds have grown to R12 500 after one year of investment, the Echo Bonus that will be payable at retirement will be R13 750.
A client who starts contributing at age 35 will receive a 50% bonus.
“Importantly, no termination charges apply to the client’s fund value and all clients will receive a bonus. But those who stay longer and make more contributions will receive much higher rewards,” says Sanlam product actuary Tiaan Fourie.
The first thing one should know when signing up for any product with a bonus structure is that there is never a free lunch. The bonus is not created from thin air and is effectively a refund of a portion of the annual charges.
The product fees for recurring contributions, which includes the adviser fee, is 4% per annum for the first R500 000, decreasing to 3.5% for a fund value of more than R1 million.
That means if your recurring contributions have accumulated to R400 000, you would be paying R16 000 a year in fees excluding the underlying management fee.
But the longer you keep the investment, the higher the portion of this fee that will be repaid as a bonus at retirement or termination – partly because the fund has collected more fees and partly because the costs of managing the investment reduce over time.
Most of the expenses incurred by the product are within the first year, and the annual charges are then used to, among others, repay these initial expenses over time.
The longer an investor stays with the product, the smaller the portion of the annual charges that is required to repay the initial expenses.
This excess in the annual charge deducted is then repaid to the investor at termination or retirement in the form of a bonus, hence the longer you hold the investment, the greater the bonus you receive as a percentage of your investment.
By year 20, the product incurs few costs apart from asset management fees. At this point, the bonus that you would effectively receive for each year you remained invested would be nearly equal to the annual fees paid.
Fourie believes that Cumulus Echo is more cost-effective than an investment-linked retirement annuity.
This is very difficult to calculate as there are too many variables to consider. But if you hold the product for a 25-year term to retirement, the reduction in yield works out at 2.1% per annum including adviser fees, which would be competitive to what is available on the market currently.
The catch is if you made the product paid up, the bonus added at termination or retirement is determined by your actual contributions paid over the term so your reduction in yield will then be higher than the quoted 2.1% per annum because you receive a lower bonus.
Fourie says clients must take their time in understanding the product and that the true benefit is only fully experienced if you hold it until retirement.
Basically, the shorter the investment period, the higher the fees; and the longer you hold the investment, the lower your fees are as a percentage of your investment. Rather than penalising clients with early termination costs, the product incentivises clients to continue investing.
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