I've read a bit about retirement annuities (RAs) on Personal Finance. I've never bought one, but picked up a couple of interesting things.
The good: asset management companies offer low-cost RAs that resemble prudentially managed unit trusts (i.e. 75% equities, rest in bonds or cash) that you can put up to 15% of your income into before tax, grow it nicely, then take it out at low tax after your retire. Allan Gray, Coronation, Investec are asset managers that offer RAs (know of others?). These asset managers introduced their RA's in response to the life assurers' RAs being shown up as rip-offs in 2005. Assurers like Old Mutual, Momentum and Sanlam still offer things that eat 5.7% of your money before it even gets invested, and Sanlam Private Investment is even worse. The life assurers also offer all manner of complex insurance-annuity products that really eat your money, especially if you stop putting money in for whatever reason. An RA should be an asset not a policy: go with the pro's.
Asset managers allow one to move to a competitor's RA, and won't charge for leaving - as with unit trusts. Like unit trusts, one can invest "as and when" one pleases, and stop the debit order without consequences. By contrast, the fine print of Old Mutual et al will tell you you're stuck with them for life, and the Max "committed" products force you to maintain monthly payments for 10 years (skipping no more than 6 payments) or face stiff penalties. Try to switch to another RA, and you'll take a stiff penalty because about almost a year's worth of payments are actually commission to an advisor and are being paid off in the form of a 10-year loan.
If there's any uncertainty about investing for retirement, find a certified financial advisor (CFA) that charges hourly rates - instead of one that takes up to 3% upfront, and up to 1% a year thereafter. Failing hourly rates, negotiate a fixed, product-independent fee and have it doled out over the lifespan of the product. The people who deserve a percentage cut of the assets are the ones managing them on a day to day basis: the asset management company. Product-associated commissions to CFAs do provide an incentive to the CFAs, the incentive to track down the highest-commission products and trick you into buying them. To their credit, Liberty Life introduced an RA last year that paid advisor commissions half-upfront and half over the life of the product in anticipation of upcoming government regulation to stop CFAs receiving their commision over just the first two years (after which they give poor service or convince you switch to a new product for fresh commissions) - and received far fewer investments because of it.
People on a company pension fund, on leaving, can move either to an RA or a preservation fund. With preservation funds the "years of membership" (used to give a tax free amount at the end) include the years with the pension, while with moving to an RAs the count is reset to zero, for a slight tax disadvantage. Preservation funds can later be moved to a new employer's pension too. With an RA however one can make further investments by debit order, whereas the only way to put money into a preservation fund is the lump sum transfer from a company pension.
The good: asset management companies offer low-cost RAs that resemble prudentially managed unit trusts (i.e. 75% equities, rest in bonds or cash) that you can put up to 15% of your income into before tax, grow it nicely, then take it out at low tax after your retire. Allan Gray, Coronation, Investec are asset managers that offer RAs (know of others?). These asset managers introduced their RA's in response to the life assurers' RAs being shown up as rip-offs in 2005. Assurers like Old Mutual, Momentum and Sanlam still offer things that eat 5.7% of your money before it even gets invested, and Sanlam Private Investment is even worse. The life assurers also offer all manner of complex insurance-annuity products that really eat your money, especially if you stop putting money in for whatever reason. An RA should be an asset not a policy: go with the pro's.
Asset managers allow one to move to a competitor's RA, and won't charge for leaving - as with unit trusts. Like unit trusts, one can invest "as and when" one pleases, and stop the debit order without consequences. By contrast, the fine print of Old Mutual et al will tell you you're stuck with them for life, and the Max "committed" products force you to maintain monthly payments for 10 years (skipping no more than 6 payments) or face stiff penalties. Try to switch to another RA, and you'll take a stiff penalty because about almost a year's worth of payments are actually commission to an advisor and are being paid off in the form of a 10-year loan.
If there's any uncertainty about investing for retirement, find a certified financial advisor (CFA) that charges hourly rates - instead of one that takes up to 3% upfront, and up to 1% a year thereafter. Failing hourly rates, negotiate a fixed, product-independent fee and have it doled out over the lifespan of the product. The people who deserve a percentage cut of the assets are the ones managing them on a day to day basis: the asset management company. Product-associated commissions to CFAs do provide an incentive to the CFAs, the incentive to track down the highest-commission products and trick you into buying them. To their credit, Liberty Life introduced an RA last year that paid advisor commissions half-upfront and half over the life of the product in anticipation of upcoming government regulation to stop CFAs receiving their commision over just the first two years (after which they give poor service or convince you switch to a new product for fresh commissions) - and received far fewer investments because of it.
People on a company pension fund, on leaving, can move either to an RA or a preservation fund. With preservation funds the "years of membership" (used to give a tax free amount at the end) include the years with the pension, while with moving to an RAs the count is reset to zero, for a slight tax disadvantage. Preservation funds can later be moved to a new employer's pension too. With an RA however one can make further investments by debit order, whereas the only way to put money into a preservation fund is the lump sum transfer from a company pension.
