Guest contributor: Terence Tobin (Rich Ideas Group (Pty) Ltd)
Opening your retirement fund statement, you’re once again disappointed with all those fees. But what can you do to change the situation? Here’s what you need to know to understand your retirement fund, the role players, the fees, and your options.
Retirement funds are governed by the Pensions Fund Act, which sets out the rules. The one part you will want to study is Section 14, which covers the transfer of retirement fund benefits from one retirement fund to another.
The first step is to notify your current provider that you want to move to a new fund and request a Section 14 Quote. This will show your current transfer amount, any fees that might be payable and documents required to make this happen.
Also ask your provider for EAC (Effective Annual Cost) and IRR (Internal Rate of Return) statements – these will show you ALL THE FEES deducted from your portfolio each year and your ACTUAL RETURN, after all the fees, since you started your investment with them respectively.
Depending on what retirement fund you have, you might incur fees for this transfer (which you can challenge if they seem high ~ ed). Stop and think very carefully! I would highly recommend that you pay a fee-based financial planner for an hour of their time and do this process together carefully, as they will prepare a report, models and recommendations – without selling you a product. Any penalty or transfer fee is a bad idea; however, rules of thumb are just a guide anyway.
What to look for
Once you have the Section 14 quote, and IRR and EAC statements, here’s what to look for:
- You want your EAC to be less than 2% per annum (ideally even below 1% ~ ed), including all the fees you pay your fund manager or provider, the administrator, your financial advisor and “other” fees.
- Now look at your IRR. Don’t rely on fund fact sheets; they only show returns over specific periods. When looking at this number, consider the mandate of the funds you are invested in, your investment timeline, risk profile and risk appetite. In my opinion, your IRR should be well above inflation to ensure your money is outperforming the cost of living and actually growing.
- Now you need the same information from your new provider. They can’t provide you with an IRR before you’re invested with them, so refer to the fund fact sheets. This will allow you to assess the asset allocation, risk profile alignment and historical returns (though there is no guarantee those returns will be yours).
- Your new provider can and must provide you with an EAC, so you can see all costs. Remember, aim to keep these below 2% per annum.
This is when calculations and due diligence should be done with your financial planner. Compare what you have with where you want to go.
If you still feel it is in your best interest to move your retirement fund to a new provider, then the real work begins – paperwork!
Hurry up and wait
A transfer can take up to 180 days, so be patient.
Various providers may have additional forms, taking anywhere from 7 to 30 days to finalise. You can’t rush this process. Documents, such as a Form H and a ROT (recognition of transfer) are then drafted (7 – 15 working days) and sent for your signature. ROTs will be done after SARS provides a tax directive, so this part varies, but usually 20-30 working days.
A tax directive is applied for either at the same time as Form H gets drafted or once it has been signed and returned. This makes the transfer tax neutral, meaning no tax is deducted to transfer from one approved retirement fund to another.
Sadly, you are not done. A Form J is drafted, which takes 15 – 30 working days to finalise.
The transferring company will then disinvest your money out of their investment portfolios (unless it is a unit transfer) before paying the receiving transferee company, usually together with, or a few days after Form J is signed and returned. Depending on the type of funds, this can be days or weeks.
Both Form H and Form J must be signed by both transfer and transferee companies. These forms are regulatory requirements, which include board approval between the respective funds to accept receipt of and transfer your funds.
Once funds are received by the transferee company they can invest the funds accordingly. They will issue you with a welcome pack or similar document confirming receipt and investment.
As you can see, many different calculations should be considered, significant due diligence must be done, patience must be aplenty and you will need to keep following up between the companies and maybe even SARS to ensure this is all done.
Before embarking on this journey, make sure you research extensively and consider having a financial planning professional help you.
Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, Carina Jooste responds to common retirement questions, ranging from which products are best suited to different circumstances to efficient tax treatments.
Carina is currently on maternity leave.