Think twice before that S14 transfer
There have been a number of legislative changes to the Pension Funds Act in recent times. As we write this an amendment to Section 14 (7) of the Act proposes that financial advisers be free to negotiate ongoing fees with their clients when completing Section 14 Transfers. Summarised, “a transferring member will be able to authorise the Fund or Administrator to pay an ongoing advice fee to their adviser on their behalf when transfer from an underwritten Retirement Annuity Fund to a non-underwritten Retirement Annuity Fund occurs.” This fee will be negotiated annually and agreed in writing with the transferring member.
Once the latest amendment is signed into law, the issue of appropriate financial advice on processing the transfer is (once again) under the spotlight. And as Old Mutual reveals the decision to transfer or not involves much more than a direct comparison of ongoing fees.
Section 14 defined
Before we continue with the discussion let’s quickly lay out what a Section 14 Transfer is. Old Mutual provides the following definition: “A Section 14 Transfer is the move of assets funding a member’s benefits in an approved fund to another approved fund or to any other person. The provisions of Section 14 of the Pension Funds Act 1956 govern the transfers between Retirement Annuity Funds.” You have to distinguish here between the approved funds such as the South African Retirement Annuity Fund (SARAF) and the Central Retirement Annuity Fund (CRAF) and underwriters like Old Mutual and Sanlam.
Old Mutual uses an example to describe the process. What has to happen if Joe Public, a member of SARAF whose benefits are funded by an Old Mutual Flexi Pension Retirement Annuity policy, decides to move his retirement benefits to a Sanlam Retirement Annuity offered by CRAF? “In order for Joe to move his retirement benefits, he will need to apply for a transfer of his benefits within SARAF to CRAF. In order for SARAF to carry out Joe’s instructions it has to cancel its contract with the underwriter, Old Mutual.” And here’s the important bit.
This cancellation takes place “on whatever terms and conditions are applicable to the contract governing [in this case] the Flexi Pension Retirement Annuity policy.” Old Mutual says that transfers within the SARAF Retirement Annuity Fund occur immediately or at month end, while those to other retirement annuity funds take approximately three months, unless a non-valuation exempt fund is involved, in which case the process can be a lengthy affair.
Legislative changes make S14 Transfers possible
When we previously discussed S14 Transfers the Pensions Fund Amendment Act had just been implemented. This Act made it possible for fund members to complete transfers regardless of rules to the contrary in their particular Retirement Annuity Fund. Old Mutual notes that these amendments were made “in the context of the increasing demand for customer choice and flexibility in retirement funding arrangements.”
These initial amendments were dominated by concerns for the retirement annuity member. One of the worries was that financial advisers not be given “undue incentives” to advise members to conclude S14 Transfers. To this end Section 14(7)(b) of the Pension Funds Act prohibited the payment of fees or commissions by any party to the transfer. The only exception in this regard was where the transferring fund paid these fees – and then only to the amount payable by the transferor at the time of the transfer.
Once this situation changes the onus will once again shift to the financial adviser to make sure that S14 Transfer recommendations place their client in a financially better situation. And that means plenty of analysis will be required.
Full analysis required to make sure client benefits
It’s critical for financial intermediaries advising clients on a S14 Transfer to do their homework. Old Mutual says there are a number of potential risks that should be considered before implementing a move between retirement annuity funds. These include:
· The risk that the fund value of the current retirement funding vehicle may be reduced when the contract is cancelled or transferred. (We hope this consideration features as part of the standard ‘before and after’ calculations to determine whether making the transfer is worthwhile).
· The risk of forfeiting valuable guarantees on the existing fund. (Financial advisers will have to make sure they check the original policy for any guarantees that cannot be met in the new fund and mention these guarantees to the client).
· The risk of forfeiting life, disability or other risk benefits on the policy when transferring. (Once again the financial adviser will have to check the existing policy thoroughly to determine whether such benefits exist, and advise the client accordingly).
· The risk of missing viable options within the same retirement annuity fund. (The financial adviser should consider options to move from “old generation” to “new generation” retirement funding vehicles as a first point of departure).
After going through the above list the financial intermediary still has to do some basic financial projections to determine if the transfer is worthwhile. Although the gut feeling is often that the client will be better off in a new arrangement with lower service fees, due attention should be given to aspects such as the capital available for transfer and the number of years to retirement.
A quick example
Old Mutual illustrates this by referring back to the Joe Public example. At transfer date Joe’s Old Mutual underwritten Flexi Retirement Annuity Fund has a value of R123 082, premium contributions of R275 per month, a remaining policy term of 10 years and effective ongoing annual charges of 3.1%. Assuming a return of 11% per annum (before costs) on this policy he would receive retirement capital of R312 867.
Should Joe transfer these funds? The first point is that the funds available for transfer (after contractual fees / penalties) amount to R104 589. To achieve the same retirement capital (R312 867) under similar conditions the total annual ongoing charges on the new retirement annuity fund would have to be no more than 1.5% per annum.
Editor’s thoughts:
Deciding to move your client’s funds from one retirement annuity to another requires a detailed analysis of the financial prospects before and after the move. It’s not enough to simply compare costs on the two arrangements. What financial analysis would you conduct before advising a client to complete a Section 14 Transfer? Add you comments below, or send them to [email protected]
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