Why new RA laws should grab your attention
Just as those of us who work in financial services don’t know about the latest developments in other professional spheres, those of you in other professions can’t always expect to be aware of all the regulatory and legislative changes that could affect your savings and retirement plans. However it is crucial that you are aware of all these developments that will affect your longest term savings – those assets that you have been diligently setting aside for your retirement years.
It’s been a couple of years since the Pension Funds Adjudicator catapulted retirement annuities and related issues into the limelight. Only now, however, is the resultant legislation being introduced. These changes have not commanded headline status in the broadsheets; yet their combined impact will have a profound effect on your own personal retirement wealth.
What are these changes and how will they affect us all as members of retirement annuity funds?
Freedom of choice for investors – in the past, members of many retirement annuity funds were prevented from transferring to another fund by prescriptive fund rules. Rather like the cell phone industry, ‘portability’ has now been legislated and all such limiting rules have been replaced to allow members to transfer to more appropriate funds if they want to.
Advice on retirement annuities is readily available again – the advent of the new generation of retirement annuity products has presented an entirely different value proposition compared to the old products of years gone by that many of us are still invested in. We should all assess whether it is financially appropriate to transfer legacy assets into the new generation products as there are significant cost and flexibility benefits in doing so – but this assessment often requires the assistance of a qualified intermediary. Puzzlingly, legislation prevented your financial advisor from earning a fee from you for work done on transferring a retirement annuity fund. This barrier has thankfully been removed and financial advisors can now earn a fee to assess investor’s options in this regard, which is fully justifiable. After all, not even the most benevolent professional is going to allocate valuable time on a pro-bono basis all of the time.
Clarity on improved termination values on transferred retirement annuities – for many would-be transferors of retirement annuities, the punitive penalties that life insurers apply on so-called early terminations have been an understandable retardant to transfers. This is arguably the sole potential reason for not transferring from a legacy fund to one of the new generation funds. Recent legislation provides welcome clarity on the maximum levels that insurers are permitted to withhold from transferring members. For transfers of policies initiated after 1 January 2009 the maximum penalty will be 15% of the fund value, whilst for older policies the maximum penalty that can be applied would be 30% - it’s important to note however that these are maximum levels and that over time these penalties reduce. So an essential step in the analysis of the merits of transferring will be to ascertain from the insurers what level of penalty will be applied to your individual case.
The returns on your investments over time will ultimately be determined by 2 factors; the investment return and the charges levied against your investment. The level of investment return you experience (once you have chosen your appropriate asset class exposure) is largely beyond your control, unless you make the mistake of trying to time the market. You’re time is much better spent paying attention to the costs and charges levied against your investment i.e. securing the best value investment offering available.
PPS Investments, as the investment business that is actually owned by all of the members of PPS offers exceptionally priced investment products with the added benefit of ownership – a unique proposition in South Africa.
