Don’t Fall for Retirement Annuity Traps – Here’s What to Look Out For
In the world of retirement savings vehicles, one of the best inventions is certainly the retirement annuity or RA, as it is commonly referred to. However, it must be said that these RAs are only as high as we make them out to be I you choose them very carefully. RAs have tax benefits that come with choosing them, but a lot of these RAs also come with catches. RAs are in place to help self-employed people save for their retirement in the way that employees usually collect using their provident or pension fund. They manage to cut their tax bills, too. RAs arenâ€™t meant for sole proprietors, though. Clients are often advised by their financial advisers to top up their retirement savings through an RA.
How Does an RA Work?
The RA is meant to work by housing assets like unit trusts or shares, which in turn, store your money in these asset forms. The performance of RAs varies across the board and it depends on many factors. The underlying investment fees can affect the performance as well. Here are some factors to consider if you are swaying towards getting yourself an RA for retirement.
Unit Trust RAs vs. Life Insurance RAs
It has been shown that RAs based on unit trusts for their portfolios trump the RAs from life insurance companies in terms of transparency. Unit trust portfolio-based RAs met the requirements of openness with their clients far better than those from life insurance companies.
Monthly Investment vs. Annual Investment
These are the two ways by which you can invest in your RA, and it is either by debit order or by lump sum. Saving up your money to make a once-yearly contribution can g a long way in helping you to cut commissions costs. This way, you also find a way around the issue of penalties should you have to reduce your monthly premiums later on, if your financial situation changes. It shouldn’t come as a surprise if your financial planner tries to convince you into making monthly payments, as they make more money form yo if you choose the monthly option.
Donâ€™t Go Beyond 55
If you choose to extend your term later on in life, if you see that you havenâ€™t saved up enough or if you shifted around your plans and now wish to retire later, you can do so. However, changing your retirement date to date sooner than initially agreed upon is asking for penalties.
By choosing age and then later extending it, you donâ€™t give these companies an excuse to smack you with penalties. If you cannot extend, you could always move your product to another investment to grow in a short-term fixed deposit, where it can still earn you money instead of earning your penalties.
Donâ€™t Get Baited By the Tax Perks
You might feel like you’re doing yourself a favor by taking an RA since you have some tax advantages. The sad news is that usually, companies tend to offer RAs with the pretense that your best interests are what drives them. They may even make a product attractive by telling you of the tax perks. But the fact is that their fees will eat into your investment, and cancel out your tax perks.Â NotÂ a lot of attention is on the fees involved in investment products. Remember you shouldnâ€™t let your financial adviser sweep over the fees without telling you correctly the debit amount from your investment and why. You have a right to know what you are paying for! So beware!
You may be looking for a good RA to save up for your good old retirement days, but know that most companies are only looking to make money and more money. The main aim in your savings is to minimize all costs, and that means that every single percent count. That 1% fee is a lot when it accumulates over time. Think of it as every 0.25% counting!
If you donâ€™t believe it, then sit down and do the math and see it for yourself. Always ask for breakdowns of the charges involved before you make a decision when it comes to RAs. Where possible, skip the intermediaries and invest directly with RA unit trust providers, cutting on costs. Youâ€™ll thank yourself when you retire!
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