RA switch saves big money: Life assurer vs low-cost RA. Real-life comparison

By Jackie Cameron

Consider switching your funds from a high-cost Retirement Annuity (RA) provider to a company that promises low-cost investment management. As a BizNews visitor’s exercise reveals, a move now could mean you have much more money when you need to live off these savings later.

An RA is an investment vehicle marketed aggressively by the financial services industry. It allows you to save in a tax-efficient manner for retirement. The cash you invest in an RA can be deducted from your income before your tax bill is calculated.

RAs have had high fees attached to them, with big companies like life assurers deducting charges that wipe out the tax savings. The fees erode your returns.

However, a number of newer companies provide lower-cost RAs. Organisations competing aggressively on cost include Sygnia, which offers access to unit trusts for the underlying investment portfolios, and 10X, which has its own range of funds.

Keeping costs low is an attractive proposition. As Magda Wierzycka, chief executive officer of Sygnia, notes: A difference of just 0.50% in the administration fee per annum reduces the ultimate level of savings by 13.3% over 10 years as a percentage of your original lump sum investment.

This 0.50% difference translates into a massive 78.5% over 20 years. Wierzycka’s calculations are based on a lump sum investment and an average return of 12% per annum. They reflect the power of compound interest.

After the BizNews visitor asked for information on switching to a lower cost RA, 10X offered to find out whether it was worth making the move. It provides free analysis for potential clients. Its report on our visitor’s investments was ready this week.

The results highlight the huge impact that even a small fee reduction of 1% can make to your returns. The BizNews community member has allowed us to share the details of this exercise (scroll below).

Bear in mind that this real-life comparison will give you an idea of how your financial picture is likely to improve if you opt for a low-cost RA – but it may not apply to your situation.

10X looked at the implications of moving an RA investment as well as a Preservation Fund investment from Liberty Life to its offering. This BizNews community member is fortunate that Liberty Life will not charge him a penalty for moving his money. This is not always the case.

A reduction in the annual asset management fee from about 2% to 1% would mean a projected maturity value of 20% more than the BizNews visitor is currently expected to make on his RA. He can expect not far off 25% more if he shifts his preservation fund savings – again because the asset-based fees are reduced from just over 2% to about 1%.

In rand terms, he can expect an extra R55 000 in his RA pot at retirement and about R185 000 in his preservation fund if he switches provider.

The asset management fees, notes 10X, are a “charge levied by an investment manager for managing an investment fund”. The fee is “intended to compensate the managers for their time and expertise. It can also include other items such as investor relations expenses, trading and administration costs of the fund”.

Other fees that eat into returns are levied by the product provider for administering the investment platform, says 10X. These include fees for record-keeping, accounting, broker commission and dealing with the management companies of the underlying funds.

In this case, Liberty Life isn’t charging any product and administration fees, because the RA plan has a paid-up status. The preservation fund’s product and administration fees were deducted upfront.

Adviser fees aren’t included here either. This is what the person who gives you advice receives.

The more fees you are charged, and the higher the total percentage of charges, the larger the gap between what you can expect now and what you might get if you switch to a lower cost option will be.

The underlying investment choice will have an impact on returns, too. But if you have two options that have similar assets and investment objectives, you are likely to find that the lower cost version will produce a bigger sum of money for you – as these calculations and projections from 10X indicate.

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Got a question about your money? Write to [email protected] Also see the Biznews wealth building section for more ideas on how to make the most of your savings and investments.

More on wealth building:

Help! My RA is performing badly. Can I switch?

Total costs exposed. ETF vs unit trust trackers. Magda Wierzycka dissects the numbers

Four easy investment mistakes that destroy wealth

Three money lessons from the world’s richest: tips for salary earners

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