Retirement annuities are not created equal. For this reason it’s essential to know how they differ.
For the purpose of this article retirement annuities can be defined as savings vehicles that offer a tax-efficient way to save for retirement. For further information see What is a Retirement Annuity?
These savings vehicles can be split into two categories:
- Traditional retirement annuities
- Unit trust based retirement annuities
Traditional retirement annuities are underwritten by life insurers and offer policy based retirement solutions. Unit trust based retirement annuities are offered by investment companies and allow you to invest directly into unit trusts without the need to make use of policy structures.
The main differences between these two are as follows:
Traditional retirement annuities typically charge a number of upfront and ongoing fees, which result in expensive overall product structures. Unit trust based retirement annuities charge only ongoing fees, making them significantly cheaper.
The more complex fee structures associated with traditional retirement annuities make them more difficult to understand, as these fees are typically grouped together and are therefore more difficult to differentiate between. The opposite can be said for unit trust based retirement annuities as the fee structures are more clearly set out, allowing investors to understand exactly what they are paying for.
The policy based structure of traditional retirement annuities makes them more rigid. This results in investors being restricted in making amendments, such as discontinuing contributions or reducing investment term – without triggering penalties. With unit trust based retirement annuities, you can make amendments without the risk of penalties.
By law, life insurers can levy termination charges of up to 30% of your underlying fund value for traditional retirement annuities if you cancel your contract or for similar clausal events. No termination charges are imposed on unit trust based retirement annuities in the event of contract cancellations or similar amendments.
A retirement age must be specified on traditional retirement annuity contracts. This not only potentially ties up funds for a longer period of time than required, but it can also result in higher commission and fees.
The same does not apply to unit trust based retirement annuities, where as a rule maturity age is set to 55. From this age onwards contracts become open-ended. This means that you can continue your investment until a more suitable point in time, if you’re not yet ready to retire.
In conclusion it is evident that unit trust based retirement annuities offer investors a fair, flexible means of saving towards retirement, as opposed to traditional retirement annuities which should be avoided at all costs.
For investors already committed to traditional retirement annuities, all is not lost. These products can be transferred to unit trust based retirement annuities. However, as previously mentioned, certain termination charges can be imposed on such transfers. The difference in fee structure and potential penalties need to be taken into account to ensure that making a transfer is in your best interest.