top of page
  • Writer's pictureLisa Perry

“Old/ Traditional” Retirement Annuities & Penalties

Updated: May 2, 2023


Why do the Life Insurance Houses still implement penalties when you choose to transfer your retirement annuity?

(Life Houses include: Liberty, Momentum, Old Mutual, Discovery & Sanlam)

Let’s start at the beginning and how the old generation/traditional retirement annuities were costed. Your Independent Financial Advisor (IFA)/ Broker would invest your monies into a retirement annuity, for this he/she would receive commission, the commission was calculated as follows:

Monthly premium x 12 = Annual Premium

Annual Premium x the term of the investment

This total would be multiplied by 3.5% which would be paid as a lump sum to your IFA/ Broker.

What the Life House would then do would be to recoup this amount paid upfront over the term of the investment and add interest, as this could be seem as a loan, from the Life House to you, for which you paid your IFA/Broker for his/her services.

The process would be repeated the following year but only 75% of the funds would be paid to your IFA/Broker. Additionally, on every anniversary of the contract, your IFA/Broker would have included an increase, as to keep your contributions in line with inflation. The increased amount would also attract commission and the process would be repeated. Therefore, over a period, although you are repaying the “loan”, the loan is still increasing due to the increased premiums on an annual basis.

An Example:

Monthly Premium: R1 000

Annual Premium: R12 000

Term remaining: 35 Years

Therefore: 12 000 x 35 = R420 000

X 3.5%

= R14 700 paid in the first year

ADDITIONALLY: The Life House may also charge you a penalty for cancelling the contract before the end of the term. This amount is restricted to 15% of your contract.

Therefore, what you inevitably get is an amount outstanding of this “loan” plus the penalty, as mentioned above, should you wish to change the provider of your retirement annuity.

Why would you then still consider changing providers?

Life Insurance houses are not the only providers able to offer you a retirement annuity anymore, LISP’s or Linked Platforms are also offering you the facility and have been for a while. The big difference between these old generation products (Life Houses) and the new generation (LISP’s) are:

  1. Platform fees (LISP’s) vs Product Fees (Life Houses)

  2. Investment choice: LISP’s include: Direct shares, sector specific unit trusts and ETF’s, which are not available within the Life House products.

  3. Asset management fees: LISP’s offer clean priced fees

There are in general 3 different fees charged on your investment:

  1. IFA fee: (0 – 1.5%)

  2. Platform Fee: Average 0.5%

  3. Asset Manager Fee: Equities: 1.5%

From my extensive research and experience, it will 99% of the time, when comparing apples with apples, be more cost effective to invest via a LISP with you retirement savings.

LISP’s include: Investec and Allan Gray. Additionally, Discovery, Momentum and Liberty also offer LISP Platforms.

Why then would you not be able to move from the old generation product on a Liberty or Momentum and have the penalties waived?

Remember as mentioned above this was a loan that was given and therefore the company still needs you to pay it back. Should the company waive this outstanding loan, there would be gross anti selection towards the company.

So, what about the “penalty/ outstanding loan”. At PWH Wealth Group we do an exercise to obtain your breakeven point of the recoup of the penalties vs the reduced fees you would pay in the LISP Platform.

Please note that it is not ALWAYS in your best interest to move, other aspects are considered when analyzing your investment such as, regulation 28, any risk benefits attached to the contract, guarantees, type of fees taken etc.

For more information or any questions please contact Lisa Perry on lisa.perry@pwhwealth.co.za


0 views0 comments
bottom of page