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Retirement Annuities
Friday, February 1, 2008
Unhappy dilemma

The Pension Funds Act was recently amended to make it compulsory for RA funds to allow members to transfer from one fund to another. This means that if you request to have your RA fund value transferred to another fund, your life insurance company must in future comply with your request, says Gerhard Joubert, CEO of the Life Offices Association (LOA).

However, he points out that while there may be good reasons for wanting to transfer, in most cases it is not in your financial interest. In addition, you may find that your concerns can usually be addressed within the RA fund of which you are a member.
Few RA fund members realise that the only way to transfer out of an RA fund is by surrendering the policy. This means that only the surrender value will be transferred and not the full fund value. “Just as you would have to sell your home and buy a new one if you had to transfer from one city to another, you will have to surrender your RA fund policy if you want to transfer your savings from one company to another,” he says.
An RA fund policy cannot be surrendered for cash like an endowment policy, since RA fund members may not, by law, access their retirement savings before they turn 55. However, since the law now makes it compulsory for RA funds to allow transfers, funds need to allow surrenders in order to be able to carry out a requested transfer.
Mr Joubert says it is important to realise that the reduction in fund value on transfer to another company is not a penalty or restriction. When saving with an RA fund or an endowment policy, you commit to a certain contractual term and premium. If you stop paying the premiums or reduce them, the policy value will have to be recalculated.
“When a policy is issued, the initial costs of the policy, which includes the commission for the adviser as well as the marketing and issuing costs, are funded by the life company which then plans to recover them over the agreed term of the contract. If the agreed premiums are not paid for the full contractual term, the costs allocated to the policy can no longer be recovered as planned. The fund value of the policy is therefore reduced to ensure that the upfront costs associated with the product are recovered.”
In terms of the Statement of Intent implemented by the life insurance industry in December 2006, RA fund policies will in future receive a minimum of 70% of the fund value on transfer. The Statement of Intent is an undertaking by the life insurance industry to limit the reduction in fund value when contractual changes are made by policyholders.
Nevertheless, says Mr Joubert, there are much better remedies for RA fund members than a transfer to another fund. If you have experienced consistently poor investment performance, you could consider switching to another underlying portfolio within the same RA fund policy.
“It is important to remember that it is not your RA fund policy that underperforms, but the underlying investment portfolio. It therefore makes more sense to switch investments within the same policy, instead of surrendering the policy and moving to another company.”
He says that most life companies now offer new generation RA fund policies, which provide great investment flexibility with a comprehensive choice of portfolios managed by various different asset managers, including access to some of the most popular unit trust funds available. And many companies do allow conversions from their older RA fund policies into their new generation policies without you having to surrender or transfer your RA fund policy.
“You do, however, need to consider the costs of the new generation RA funds versus the costs you are paying on your existing RA funds. Some of the older types offered excellent value for money. Increased flexibility does come at an additional cost and you may find that the charges on some of the newer products are higher.”
Mr Joubert adds that there is an increasing demand for transfers from RA funds underwritten by life insurers to unit trust linked RA funds. He says they can be cheaper than the life linked RA fund policy, but you do need to consider whether lower charges will make up for the reduction in fund value on transfer out of a life linked RA fund.
In addition, unit trust linked RA funds, unlike life linked RA funds, do not offer premium waivers in terms of which the life company will continue paying your premiums should you become disabled and unable to work. They typically also do not offer investment guarantees or smoothed bonus portfolios, generally only available through life linked RA funds.
Often the unit trust linked RA funds require higher monthly investment amounts than the life linked RA funds. Mr Joubert points out that no commission can be paid on a transfer. The Pension Funds Act prohibits the payment of ongoing fees to a financial adviser by the receiving RA fund if no ongoing fees could be paid by the previous fund. The aim is to protect clients from being encouraged to transfer to another RA fund as a result of trail fees.
Before transferring to another RA fund, you also need to consider that if your RA fund offered life and disability cover or guarantees, these may fall away as they may not be available from the new fund.

Copyright © Insurance Times and Investments® Vol:21.1 1st February, 2008
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