YOUR MONEY: Learning the hard way

About 40 years ago I saw the need to supplement what I knew would be a small pension on retirement and started monthly payments into a retirement annuity, taking into consideration the tax effects of such payments.

The RA was in effect a fund of funds, my money being placed in six or eight separate funds managed by third parties. This spread risk, I was told. About 15 years later I was prompted by an article in the FM to inquire into the commissions being deducted from my contributions and from the capital sum.

I learnt that I paid a small sum to the broker, a bigger percentage to the large insurance company that managed the overall fund and a bigger percentage still to the various fund managers who invested the funds. Based on a 10% a month withdrawal I would be receiving slightly less income than the various parties were receiving commissions!

I ceased paying into the RA and started purchasing units in a group of unit trusts managed by Nedbank. That way I paid only the commission charged by the bank. Once I retired, I withdrew 10%-15% a year of the RA, later increasing it to the maximum allowed, to steadily exhaust the RA fund. All income in the unit trusts was reinvested from the first.

I now have substantial capital in unit trusts but, annoyingly, about two-fifths of it is subject to capital gains tax! But even with the tax the unit trusts have proved much more rewarding than the RA, not least because the commission deducted from my contributions was substantially less.

Learn from my mistake: always first check what commissions are deducted from your investment outlay before you decide where to put your money.

Robert Stone 

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