Who is retiring gracefully?

2012-06-25 08:21

Chris Moerdyk

I notice that after a few years of inactivity, retirement annuity policies are starting to be advertised by the big insurance companies again.

After having been a victim of retirement annuities and seeing others suffering the same fate a few years ago, I have told my children in no uncertain terms that if they buy a retirement annuity policy I will disown them.

I have suggested that they rather buy shares in the insurance company because that way they will make a lot more money.

Now, I've always thought that those big, bold health warnings on cigarette packets were a waste of time because even a brain dead newt knows that smoking is bad for you. The same applies to warnings that are about to be slapped all over liquor bottles. They're all stating the obvious and are nothing more than a rather futile attempt at curing cancer with a Band Aid.

Snake oil salesmen

But, there are some products that desperately need health warning stickers.  Like pension, retirement annuity and all sorts of other investment products sold to us by modern day snake oil salesmen.

Advertisements and policy documents should be clearly labelled: "Warning - You Are Now Gambling." Because, that's what it is really all about. Nothing more, nothing less.

It was about six or seven years ago that a parliamentary committee heard one horror story after the other about pension fund fees and just before that, the then Finance Minister, Trevor Manuel,  lashed out publicly at the "horrendous" fees charged by life assurance companies for retirement annuities.

Round about that time I made a concerted effort to ask family and colleagues at retirement age whether they were happy with what their annuities would  pay out and I not found a single person who is even remotely satisfied.

They were all furious in fact, with a lot of them actually getting out less than they paid in.

Disgusting marketing

One of these was former media chief executive, financial journalist and now columnist for the Business Times, Stephen Mulholland.

In a delightfully acerbic column at the time he wrote: "When I think of the years and years of contributions I made to annuities that now pay me a pittance, I could weep.

"We often forget," he added, "that insurance is nothing more or less, than a vast casino."

The way in which these things are marketed is nothing short of disgusting quite frankly.

First of all, the brochures and ads all have big bold charts showing that if you invest X amount for Y number of years you will end up as rich as Croesus and all your worries about retirement, education fees for the kids and being able to flit about on overseas holidays,  will disappear.

Nothing new

My wife and I bought one of those tertiary education policies when our youngest kid was born. By the time he started high school our financial advisor calculated that by the time he started university the policy would actually pay out just enough for about a year.

Shortly after that the same financial advisor suggested I get rid of my retirement annuity policies, so I called the insurance agent who had sold them to me. His immediate response was: "Wow, have you still got those things - I dumped mine years ago - they're useless."

This is all nothing new of course. More than a century ago Ambrose Bierce wrote about insurance as "an ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table."

Nothing has changed.   

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  • Zing - 2012-06-25 10:39

    Great article, Chris. I share your sentiments 100%. You said: "I have suggested that they rather buy shares in the insurance company because that way they will make a lot more money." Companies like Sanlam, Old Mutual, Liberty, other insurance companies, and even the big banks have to answer to their shareholders before they answer to the policy holders. When business goes very well, shareholders get hefty dividends and the policy holder gets . . well good returns. When business is not so good, the policyholder has to share in the loss as if he was a shareholder to start off with.

      Konstabel - 2012-06-26 09:18

      The statements made by Chris were certainly true of the old RA products but since the regulations on these products has changed the insurance companies have to be transparent with the fees charged and more realistic about potential returns. The only reason why one would use RA over other investment options are the tax breaks. If you have existing RAs check see if you will loose more by continuing with the product or by cancelling now. Also see if you can move it to a better product with the same insurer without having to pay cancellation fees.

  • gina.jardim - 2012-06-25 10:56

    Hi Chris, in a nutshell, what would you suggest we do with RAs currently owned? And where should we rather invest that money - good unit trusts perhaps?

      Chris - 2012-06-25 13:34

      Hi Gina I really wouldn't dare try and answer your question. I am no investment or pension expert . As you will see below I have been told that RA's these days are different to the older one's in terms of agents fees etc., but I am still very cynical about how they will perform. I just know far too many people who have been let down by insurance industry pension products. These days I just do m y own investing and in spite of not being an expert my performance has been better than any insurance company has managed to do for me in the past.

  • tomas.blendulf - 2012-06-25 11:12

    Hi Chris The RA policies you refer to are the old type insurance company products that paid advisor's upfront commissions. The client signed up for a debit order, and the advisor received commission based on a term (e.g 15 years worth of premiums) based on a percentage. This meant your policy began life with a massive liability to pay back the advisor's commission, so regardless of how well your underlying investment fund performed you were doomed to poor performance. Today if you purchase an RA through one of the LISP platforms, there are no upfront commissions payable. The advisor receives an ongoing fee (e.g. 0.5%p.a.) based on the investment value for which they are supposed to monitor and advise on your underlying investments. This means the RA should cost no more than you would pay buying a basket of unit trusts on the LISP platform, and all the fees are transparent and easy to understand. It's a shame these old practises have given RA's such a bad name, they are still great tools for retirement planning (particularly for the self employed). Your income, capital growth and dividends are tax free in the RA, and you get some creditor protection for the funds should you hit hard times. So don't disown your kids if they buy one! Provided they use a LISP platform and incur a reduction in yield of 2% or less.

  • Nukki - 2012-06-25 11:37

    totally agree, have been down the same road and what was suppose to be millions on retirement (after paying in for over 30 years) only a lousy amount was available. Needless to say, I warned by kids not to invest in any insurance!!!

  • thomas.more.946179 - 2012-06-25 14:39

    Great article Chris, I think you really nailed it. I invested heavily in these insurance companies just to find out later that the Rolls Royce they promised me turned out to be a Rolls Royce dinky toy. Like you, I try to do my own investments and after burning my fingers a few times I think I have it now much under control. Why would somebody else make you rich if they can do it for themselves? I read tomas.blendulf statement but still have no faith in the insurance companies any more. At least I have control over my own money and are not dictated by heavy penalties etc. if times are tough and I can't afford that extra money on premiums.

  • franz.smit.9 - 2012-06-25 15:02

    Hi Chris You probably don't have medical aid either. Because you don't believe in it. The new RA's are perfect for investing long term, especially if you are a business owner (such as myself) because of the creditor protection it offers as well as the obvious tax advantages. I believe you never used your RA in the correct manner, never managed it and probably like the rest who had terrible returns forgot about it. The idea is to re-invest the money you get back from SARS into the fund so as to grow it faster in so doing benefiting from greater compound interest. Also, in which funds were you invested in? Aggressive, Moderate or Conservative? What was the strategy and did you keep to it? I fully agree that the costing surrounding RA's used to be excessive. But only if you were paying someone who really had no idea about investing to "manage" your investments. If it was managed by someone capable, you would have still managed to return a minimum of inflation. I think just spewing out an article that's sole purpose it to attack a product type is reckless. Especially as you are no Investment specialist and it is purely opinion based with clearly no research done into the matter.

      mervyn.mayer - 2012-06-25 15:48

      well said Franz, an article like this is totally reckless especially when government is trying to encourage people to save.I don't think Chris has taken the time to ask people who have lost there business, have had everything repossesed or sold due to liquidation, if they had an R/A and what it meant to them . A client lost his business,assets and was living in a granny flat at the age of 60. All his policies were surrendered, shares sold except for 1 R/A with R 700 000. He was left with some dignity.

      luc4sdreyer - 2012-06-25 17:50

      100% true. It's sad that News24 allows such nonsense to appear on their website. Yes I read the disclaimer, but spreading misinformation can negatively affect anyone who receives it (like shouting "fire" in a crowded theater).

      Zing - 2012-06-25 20:24

      Oh my gosh - you guys either work for the industry, or you have been indoctrinated! Insurance is a business that looks after itself first, then its clients. The only reason the old RA's are no longer around is because you were caught with your pants down. Who knows what other devious schemes are lurking in the current ones?

      Misty - 2012-06-26 07:25

      oh my word. Are you still selling snow to the eskimo? Do you actually believe the drivel you are spewing or are you just protecting your own interest? If there ever was a Ponzi scheme then insurance is the biggest one.

      Vaaldonkie - 2012-06-27 09:01

      Although I sometimes disagree with Chris' macro-economic views, one has to keep in mind that he actually knows what he is talking about. Personally, I would only buy a financial product if my broker also uses it.

  • zaaristotle - 2012-06-25 15:38

    Chris - I think the key is carefully choosing your RA. From experience I will never buy from OM, SANLAM etc. as they have a track record of non performing RA's. However I can't say the same about specialist investment houses. In my experience they seem to get it right - I'm not sure why - perhaps because some fees are structured around performance, and not fixed.

  • frank.swanepoel.3 - 2012-06-25 15:43

    Chris I fully agree with your article. The problem is that these insurance people show you a wonderful big amount that you will have in say 40 years time without telling you what it is worth in today's terms. As a quick example R20 million in 40 years is only worth about R250k in today's terms. So you give away your hard earned money every month and at the end of the day you only have R250k to spend when you retire. I've noticed a few people are talking about creditor protection if you're a business owner. A far easier and less expensive way to go (and which give you far better protection) is to make use of trust rather than using the insurance companies.

      franz.smit.9 - 2012-06-25 17:20

      So what you are saying Frank, is that inflation is caused by people in the Insurance industry ? Also what you need to remember is that Insurance and Investments should be run independently. If not, then you are talking to the wrong people and getting the wrong advice.

      franz.smit.9 - 2012-06-25 17:26

      I agree with trusts having its place. But that has its own rules and regulations and would be used under different Circumstances to an RA, with two very separate functions and goals.

      frank.swanepoel.3 - 2012-06-26 07:50

      No pilot, I will be daft to say that the insurance industry is causing inflation. However that is a typical response that I do expect from the industry when it is pointed out that the amounts they use to sell these products to the unsuspecting public is not the full disclosure that it is supposed to be. RA's is, and will always be a very expensive product, either because of the fees involved or the fact that it is not a well performing product that is giving false sense of security to millions of people.

      piet.strydom - 2012-06-27 04:25

      I can still remember the day an insurance salesmen showed me the projected returns on a monthly contribution I would make. His smile quickly disappeared when I asked him to discount the future value to the present value using the inflation rate. I agree, do your own investing. It is not that difficult. But you need to start early, because you WILL make mistakes.

  • Tony - 2012-06-25 21:13

    Hi Chris, your neighbor here :) I think the main issue that comes from your comments on the industry is that we have some work to do with regards to our image and consumer education. I understand your frustration and that of many people who did not receive thorough advice. The fact is that the millions of people that do get to retire, either comfortably, or at least with some form of dignity, do so because they have put money away in a retirement fund, which is mostly run by insurance companies. The insurance industry pays out millions in disability benefits, death benefits and critical illness benefits. All these are sold by insurance companies. As with all industries, there are those who are underhanded. (My pet hate are cell phone companies). Most people who are unhappy with their old retirement annuities bought life cover and retirement savings in the same plan. Therefore, to determine whether it was bad, you need to strip out the cost of the life cover before calculating the returns. I am not a financial planner and do not work for the insurance industry, but, as a journalist in the financial services environment, I do know that there are a host of great retirement annuities out there and brilliant financial advisors who can provide advice that will assist towards a comfortable retirement. Thanks for opening the debate.

      frank.swanepoel.3 - 2012-06-26 07:44

      Tony RA's and death and disability cover are separate things. I do believe in having death and disability cover as part of your risk profile, just as having home and car insurance. What I do not believe in is retirement annuities. The figures given by the insurance industry is as far as I am concerned either overinflated or they do not tell the financially uneducated person the whole truth. A lot of people, especially when they just start working see these millions of rands that the policy is worth when they retire, without anyone in the industry explaining to them that with inflation that amount is actually amounting to almost nothing. Like I've said above, R20 million in 40 years time will not be enough to ensure a comfortable retirement for say 20 years, let alone 5 years. Yet that policy will cost you tens of thousands of rands each year and is giving people a false sense security.

      pilotinsurecoza - 2012-06-26 11:32

      Hi Frank. What Tony is trying to say is this. Back in the day 5+ years ago your RA and your life cover, disability and your dread disease cover was Intertwined. You paid R2000 pm with R800 going towards your risk products, R150 going towards costs and only R 1050 going towards your savings(example and not 100% accurate).This was the biggest problem. 1:No one new how much was going towards investment and how much to risk 2:Some of the older adviser (salesman) used the total amount to illustrate the investment value at retirement. (only some, the good outweigh the bad 9-1) 3: Costs were extremely high, and its not only the general public that was fighting that, the advisers themselves were as well. This has all changed, now its all separate, the costs are transparent and you have 100s of choices where to invest. Different funds have different costs associated to them and advisers can adjust commissions from upfront to on going. Very flexible. I think there is a market for an RA, and it can be used brilliantly. But if it is not in your best interest (based on income, line of work, risk profile) then you should look at other avenues. [property (listed/unlisted), Unit trusts, starting a new business or stashing it under the bed] then a good adviser will explain it practically. The only reason I am commenting on this article is because the full story is not being told. But yes, I do understand Cris, you must be frustrated for "loosing" money. I would be as well.

  • Stephen Redford - 2012-06-26 07:59

    I don't work in the industry. I had one RA which I stopped. Here are some obvious reasons why i stopped my RA (RA's are potluck in my opinion) : 1) you have no real idea who is managing your money - the salesman rarely is involved in managing your money 2) It is easier to add people to the RA pot than to grow the RA pot consistently through investment- where do you think companies apply their focus ? 3) RA's are a GOOD investment if you are poor at managing your own money (although there are other places to put your hard earned cash) 4) Putting money into RA's instead of paying off your bonds/cars faster is silly 5) An RA isn't like medical aid/ life insurance. It is enforced long term saving - insurance is about managing risk, not saving. I stopped the "savings" portion of my medical aid. The part of medical aid I need is the insurance portion. The balance of cash pays off debt. 6) At some point if the RA pot gets big enough, the tax rules will change - who knows what the impact of this would be ! I believe in managing my own money - if I get it right, all the profits are mine. If I get it wrong all the profits are mine. Nobody i know ever got rich investing money in an RA.

  • piet.steyl - 2012-06-26 17:06

    The chicanery on RA's was done by confusing the buyer by combining savings with life insurance - never the twine should meet. I made the same mistake bu buying RA's and and Edufocus policies with embedded life insurance. Later I discovered that I had life cover on my children for whom I was trying to save up and education fund. So should the kids die I would have a life insurance payout to do what with ? Surely it makes no sense that the surviving parent should get a payout to go to varsity with? I have since - at great penalty costs managed to get the money out of those policies and invested them in pure AG unit trusts. Even an RA can be moved to an Allan Gray Unit trust based RA - WITH NO LIFE COVER and off course no insurance premium as a portion of the monthly debit order. Well over 99% is used to buy unit trusts and I get to deduct that from income for tax purposes. In addition - the fund growth is also tax free. I will have to pay tax on whatever I take out of the fund at retirement - except off course the first R300K at 0% and the next R300K at 18%. Thus you can in fact take R600K at 9% - effectively.

  • priya.boshoff - 2012-06-28 07:48

    This landed on my desk this morning... Looks quiet interesting

  • Stu Coates - 2012-06-29 16:47

    There seems to be some form of misunderstanding about RA's here. The RA is merely an investment vehicle with underlying assets. The underlying assets need to perform to allow you to benefit from the long term saving toward a retirement goal. RA's also provide a great form of tax saving, both on contributions made into the RA as well as growth and revenues paid from the underlying investments. It is correct to say that insurance companies and their salesman were responsible for providing products which were not monitored over time and delivered poor growth. The goal here would be to develop a relationship with an investment professional who can adequately provide ongoing advice and guidance. They would use actual investment companies, make full disclosures as required by law and be held accountable for bad advice. This is not the issue of the RA at all, it is an issue of the integrity of the people who provide the service and the companies they work for.

  • steven.nathan.526 - 2012-07-05 15:55

    Chris is right that most RAs have robbed investors’ blind. We (10X Investments) have done a lot of work on this as we share Chris’ concerns. Over the last 40 years, a balanced portfolio (70/30 equity/bond split) returned around 15% pa. R10 000 invested in 1970 would have grown to R2.7 million in 2010. But that’s before fees and inflation. Today, most life company RAs have total expense ratios (called a Reduction in Yield) of at least 3% (of your investment balance) but were higher in those days. A 4% fee would have reduced your R2.7m by 75% to R650 000. After inflation (10% average) your R650 000 would be worth just R15 000 in 1970 purchasing power! The high fees charged by the life companies destroyed massive value for investors but were not disclosed. What I find astounding today, is life insurance companies and others do not have to disclose total fees charged. I believe each investor should be sent an annual invoice detailing all fees charged. If this happens you will quickly see how much of your wealth is being transferred to brokers, fund managers, product providers etc. and you would not have had to wait 30 to 40 years to discover you were “robbed” blind.

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