We all know the difference a percentage can make. That’s why transferring your retirement annuity can be a smart move if your current provider’s fees are eating into your retirement savings.

The high cost of legacy annuities

Before we break down the transfer process, let’s first look at potential penalties, starting with the notoriously high fees associated with legacy annuities. Annuities issued before 2005 are considered legacy annuities. Some life insurers charge exorbitant “termination charges” or “termination penalties” for transferring or discontinuing regular contributions. These fees can range from 0% to 30% of your investment balance and often include administrative fees and the recovery of initial commissions.

Factors influencing penalties

Several factors can influence the exact penalty, including:

• Age: Younger policyholders may face higher penalties due to a longer investment horizon.
• Policy Term: Shorter-term policies might have lower penalties.

Fortunately, significant changes have been made to reduce these hefty penalties. Maximum penalties were capped at 15% for products sold after 2009, and today, the current penalty stands at 10% and is set to decrease further to 5%. These changes empower investors to move their legacy RA funds to more cost-effective, higher-performing investment portfolios.

How to assess your current provider

To assess your current provider’s performance, request an EAC (Effective Annual Cost) and IRR (Internal Rate of Return) statement. The EAC will provide a clear breakdown of fees, while the IRR indicates your actual returns after fees. The IRR should outperform inflation.

How to assess potential providers

Request an EAC and fund fact sheet from the providers you are considering.

EAC: Aim for an EAC of 1% – 2% per annum (the lower the better)

Strong returns: Consider the potential fund’s historical performance and its alignment with your risk profile.

The transfer process

Once you’ve decided to transfer, here’s a general overview of the process:

1. Initiate the transfer: Contact your current provider to request a Section 14 Quote.
2. Gather the necessary documents: You will be requested to prepare some required paperwork and to obtain a tax directive from SARS to ensure tax neutrality.
3. Seek professional advice: Consulting with a financial advisor can help you navigate the complexities of the transfer process and make informed decisions.

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.