It’s a well-established truth that constantly switching portfolios will harm your long-term investment outcomes. But what if your retirement annuity (RA) has underperformed for the past five or even 10 years?
Roanleigh Thambiran, head of business development at Cannon Asset Managers, says that one of your primary concerns in deciding whether to move your RA should be to examine the impact that high fees might be having on your investment results.
“Fund performance is usually reported net of fees, and often when your funds appear to have performed badly, it might be the result of excessive fees eating into returns rather than a reflection of the performance or growth of the portfolio’s underlying assets,” she said.
“It stands to reason that a portfolio that utilises the same investment benchmark and is invested in similar asset classes, but charges lower fees, has a far greater chance of achieving the targeted returns and has a higher likelihood of helping you to reach your investment goals – even if you pay penalty fees or early termination charges to move from a higher-cost solution to a lower-cost solution.”
Old school vs new school
To demonstrate the benefit of lower fees on investment outcomes, Thambiran offers an example drawn from a real-world scenario of a 45-year old investor who currently holds R550,000 in their retirement annuity, and is choosing whether to switch portfolios.
The investor’s current portfolio, the Old School Portfolio, targets average returns of 10% per annum before fees, and charges investment fees totalling 6% per annum.
The alternative investment, the New School Portfolio, also targets 10% per annum, but only charges 1.2% in fees.
If the investor moves their funds to the New School Portfolio, they would pay a penalty of R40,000 from their R550,0000 retirement capital, which would leave them with an initial lump-sum of just R510,000 instead.
If both portfolios achieve their performance targets, the 4.8% reduction in annual investment fees means that despite having paid the penalty charges, the New School Portfolio would outgrow the Old School Portfolio by over R38,000 within three years.
In 10 years, the New School Portfolio would have outperformed the Old School Portfolio by more than R371,000.
And by the time of the investor’s retirement at 65 years, the New School Portfolio would be worth R2.75 million – more than double the result of the Old School Portfolio, which would have achieved just R1.2 million.
Other key points before you switch
Thambiran outlined a few other key points you need to factor in before making your decision, including:
- Investment objectives: If your investment objectives have changed since you first invested, you should carefully consider whether a new investment portfolio is aligned with your current investment needs and goals. For example, your time horizon and risk appetite might have changed;
- Past performance: While past performance is not a guarantee of future returns, you need to examine the historical performance of any new portfolios before deciding to invest, and weigh this against the potential investment fees;
- Guarantees and benefits: Traditional RA policies sold by life insurance companies may carry additional benefits such as investment guarantees, or life or disability cover that may be cancelled if you switch portfolios;
- Flexibility: New-generation RAs usually offer the benefit of greater flexibility than traditional RAs, allowing you to adjust your underlying investments, and pause or change your contributions as you may need;
- Section 14 procedure: When you transfer your retirement fund, you and your investment provider will need to follow the process outlined within Section 14 of the Pension Funds Act. This means that your new investment provider will need to obtain the necessary transfer documents from your current provider and then apply to the Financial Sector Conduct Authority (FSCA) for approval to transfer your retirement funds. This process usually takes between three and six months to complete, but as demonstrated in the case of the above example, those three to six months could prove invaluable by leading to a doubling of your retirement capital.