Retirement Annuities 101: If costs are the decider; How to choose the ‘right’ RA (Part 3/4)

Sygnia’s CEO Magda Wierzycka
Sygnia’s CEO Magda Wierzycka

In part three of four in the Retirement Annuity 101 series by the CEO of Sygnia Asset Management, Magda Wierzycka draws a comparison between fees in three lump sum scenarios – investors can be quite short sighted in this regard – and outlines how differences in costs  per year can really impact the return on your RA. – CH

By Magda Wierzycka – Chief Executive Officer, Sygnia Asset Management

Once the decision on investment strategy is made, you need to look at the choice of an RA (relatively easy, as most LISP platforms offer RAs). What’s not easy, is making sense of costs.

In the minds of most investors, costs seem minor. Few are able to grasp the impact of what, for example, a difference of 0.3% per year can really make over the lifetime of an investment. Worse still, many don’t even realise that these fees are charged annually on the total investment (and not on the monthly instalment, for example).

This week, I’ve compiled a comprehensive cost analysis that illustrates the impact fee structures have on investors’ net returns.

The RA-providers included in the analysis are:

  • Allan Gray
  • Investec IMS
  • Momentum
  • Glacier (Sanlam)
  • Fairbairn Capital (Old Mutual)
  • ABSA AIMS
  • Sygnia
  • 10x (this is not a LISP, but an amalgam of an RA and an index-tracking investment strategy)

The cost of an RA needs to be deducted from the net-of-cost performance we investigated last week to arrive at the true return that an investor will enjoy.

To simplify the cost analysis, I’ve used the example of three investors: one investing a lump sum of R100,000, one investing R500,000 and one R1,000,000.

This is important: as costs are highly sensitive to the level of savings, I would suggest that you look at the analysis most reflective of your circumstances, rather than trying to compare all three.

Crucially, you need to consider the power of compound interest in these examples. A difference of just 0.5% in the administration fee per annum reduces the ultimate level of savings by 13.3% over 10 years, a massive 78.5% over 20 years and a massive 348.1% (!) over 30 years (the calculation is based on a lump sum investment and an average return of 12% per annum).

Notes for all three examples:

* Investec IMS charges significantly higher administration fees for investments via its “wide selection” FundChoice platform. A more restrictive iSelect list is offered at a more competitive fee (which is quoted above).

** Momentum charges significantly higher administration fees for investments via its “wide selection” FundShop platform. A more restrictive Core Portfolio list is offered at a more competitive fee (which is quoted above).

There is a minimum administration fee of R42 per month for lump sum investments. Additional fees applicable to a Momentum RA include:

  • Transaction fees for withdrawals and switches unless done online
  • Additional loadings apply for international capacity and international administration

*** Absa AIMS charges a combination of a flat fee (R200 per annum) and scaled percentage fees. 

 

For the sake of completeness, the table below includes some other popular RAs available in the market. The fee structures are similar to others already included above.

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Notes:

* PPS RA calls the rebates from asset managers “partnership saving”.

** Discovery offers 4 free switches a year, and thereafter charges 0.29% per switch up to a maximum of R500. Discovery also offers an option of not paying initial fees and rather spreading those as annual deductions over 5 years. If one selects that option, financial advisory fees are added automatically and termination penalties are very onerous.

These comparisons help shed some light on costs and their potential compounding impact over the long term. Percentages are one thing, but in next week’s final instalment, we look at the real numbers in each scenario.

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