Despite changes, costs and lack of transparency still eat into retirement funds By Tony Barrett, head of wealth management, Barnard Jacobs Mellet Private Client Services.
There have been many changes affecting the retirement industry in the last few months. First up was the landmark ruling by the Pension Funds Adjudicator which dealt with the ability to transfer retirement funds prior to retirement age. The other was the implementation of the statement of intent which has set minimum values that will be maintained should a client make contractual changes to their RAs such as canceling or reducing their premiums or reducing their retirement age.
While the industry may herald this as a great gesture of goodwill, the reality is that should a member make a contractual change to his RA policy, the cap on charges still allows up to 30% deduction of charges. While preventing the types of pillage where members saw deductions of up to 70%, charges in traditional RAs are still extremely high and opaque in nature and it is virtually impossible to obtain an accurate breakdown of all the costs and fees that are levied against the investment portfolio. It is also often difficult to find out the exact nature of the underlying investment portfolio and poor performance is more often than not the legacy that investors are left with, this is particularly true of the so called old generation products. This brings me to the PFA ruling. Many investors who dutifully and, for many years, invested hard earned savings into retirement annuities have become increasingly disillusioned with their investment growth, or lack of it. Up until now investors have been in a Catch 22 situation where the specific underlying rules of a retirement annuity fund prevented them from switching their investment to an alternate fund manager or institution.
The Adjudicator ruled that not allowing investors to transfer their portfolio was contrary to the rules of the SARAF, the Pensions Fund Act and the Financial Institutions Act. This is most definitely welcome news for all investors who are members of poor performing retirement annuities.
Investors are now able to switch their lump sum in their retirement funds in order to obtain better performance and a far more transparent cost structure. For high net worth individuals who are seeking a retirement product that offers both cost efficiency and transparency of performance, a personal share portfolio or multi-managed fund through a retirement annuity wrapper will ensure that they never experience value reductions of 30% should they make their policies paid up. There is often no upfront fee and the annual fees are clearly indicated. As no fees are recouped upfront, should an investor choose to no longer make contributions there would be no deduction to the capital value of the fund which would simply be left to grow until retirement age. The investor also has a full understanding of the underlying investments and with the advice of his or her manager can make appropriate changes. The investment can also be tailor made to meet the unique needs of the investor as opposed to a vanilla, one size fits all, product. While the traditional retirement industry may have made some minor improvements to long suffering clients, every one percent charged against your retirement fund has a material impact on your retirement nest egg.
*Barrett is head of wealth management, Barnard Jacobs Mellet Private Client Services.
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