Q&A: How do I know what RA to buy?
Saving in a retirement annuity is like having a free lunch
Q: I am turning 35 in November. I am considering annuity cover. Please advise with which firm I would have the best return. — Committed saver, via Money’s Facebook page
A: Ricardo Teixeira, Certified Financial Planner® professional at BDO Wealth Advisers, replies:
It’s never too late or too early to start saving. A company pension or provident fund is often our starting point for retirement savings, but if you don’t have one or want to top it up, a retirement annuity (RA) is a great product. A notable feature of an RA is that you don’t pay any tax on your investment growth and you get a tax deduction for saving. It’s like having a free lunch on Sars’s account.
In order to give yourself an opportunity to earn the best investment returns that you can in an RA, consider the following:
How long and where
The returns you will earn are all about where your money is invested and how long you have it invested.
At your age, you have 20 years before you can draw down on your retirement annuity (age 55 is the minimum age at which you can access your RA savings and start drawing an “annuity” or a monthly income).
It is possible you could live to about age 90 or older. This means your RA savings will be with you for at least 55 years or longer. This is a good thing. The longer the time frame you have to save, the better your investment returns are likely to be.
With a really long savings period ahead of you, your RA savings should be invested in an equity-linked investment portfolio. The higher your allocation to shares (equities), the better your investment returns are likely to be over the long term. The highest allocation you can make to shares in terms of regulation 28 under the Pension Funds Act is 75%.
Most RA providers offer a range of investment portfolios from which you can select where your savings will be invested. Choosing an investment portfolio can be overwhelming because of the range of choices.
Consider costs carefully
All RAs carry a cost. Knowing what the costs are is important as your net return on investment will be after paying costs. The costs that you need to consider and inquire about are:
- Administration costs: The administrator is the provider that will issue you with statements. Administration costs cover the cost of these services.
- Investment portfolio costs: Asset managers are responsible for investing your savings. Each investment portfolio will have a different total investment cost. This is a standard disclosure for all regulated investment portfolios so will be easy to identify and compare. Beware of investment portfolios with “performance fees” as this tends to add to the cost.
- Advice costs: If you decide to DIY your RA savings, you won’t have any advice costs. Having a financial planner to advise and keep you from making big mistakes has a cost but it can add significant value to your return.
This is a long-term decision so choose your provider or administrator carefully. You want to have the peace of mind that they have the experience and ability to manage your RA accurately and correctly.
The most important decision you will take though is to get into action and start saving.
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