A Section 14 transfer is the transfer of a retirement fund (i.e. retirement annuity RA, pension/provident preservation funds) to another in terms of Section 14 of the Pension Funds Act.
4 Key considerations
Cost: It goes without saying that the lower your overall fees are, the more capital you will have to grow your retirement funds. Compare the effective annual cost (EAC) of the current retirement fund to that of the recommended retirement fund. The EAC measure was introduced to enable clients to compare the charges between funds and the impact that these charges may have on their investment returns.
You can also rack up costs by having funds on different platforms as most of them charge administration fees on a sliding scale basis. Consolidating your investments could result in lower administration fees.
Flexibility: Flexibility is an important feature of your retirement fund; you want the freedom to reduce your monthly contributions, make the fund pay up or transfer to another platform without incurring penalties. You do not want to incur unnecessary costs when you need to adjust your retirement annuity.
Investment term: If you face transfer penalties, you will need time in the market to recoup these expenses. Thus the break-even point is also an important consideration, this is the point when you will have recovered from the initial penalty. There may be the risk of death or disability prior to the break-even point. However, this can be addressed by having risk assurance in place.
Potential investment return: You will also need to look at the potential investment return of the recommended fund. This will depend on several factors, including but not limited to a combination of the above. Your wealth manager will also need to consider the underlying investments of your portfolio and risk appetite.
Let us have a look at how the above can have an impact on your retirement:
|Description||Platform A (Current RA)||Platform B (Recommendation)|
|Year to retirement||20||20|
|Current investment||R1 000 000||R900 000 (after penalty)|
|Monthly recurring contribution||R3 000||R3 000|
|Annual escalation rate||10%||10%|
|Total ongoing fees (EAC)||3.50%||2.50%|
|Nominal growth rate after fees||7.62%||8.62%|
|ILLUSTRATIVE RETIREMENT VALUES|
|Capital at retirement||R8 073 709||R8 772 220|
|Present value of capital||2 517 421||2 735 220|
|Break-even point||10 years||10 years|
Although the fees may have a significant impact on investment returns, they should not be the only area on which you focus. The penalties that may be incurred due to the transfer may not be justifiable if you only have a few years until retirement.
You will not know whether a Section 14 transfer is in your best interest unless you do an assessment like the above to consider the effect thereof. Your financial adviser is best suited to help you do this and can advise as to the most efficient way of managing your retirement funds.
Our holistic approach to mapping out your financial plan takes into account your individual needs from a personal, family, business and legacy perspective, ensuring a reliable, balanced outcome.Contact one of our private wealth managers today.