Total premiums received by insurance companies into recurring premium RAs during 2005 was R9.9 billion. Last year, that number was R21 billion.
This clearly shows how RAs have become a critical part of the retirement funding landscape, bolstered by an expanding formal-sector workforce, says Mark Lapedus head of product development at Liberty Investments.
While those who are self-employed might use RAs for their primary retirement savings, they are mainly used by investors who want to supplement their formal pension or provident funds.
“In some cases people want to have control of their own money,” says Lapedus.
“In others they are just seen as the easiest top-up vehicle for those who have retirement savings but realise that isn’t enough.”
As RAs have become more popular, they have also been more heavily scrutinised. “Old-style” products have come in for a lot of criticism due to their fees and penalty charges. New products have become more investor friendly.
“Another trend is a move towards using index funds for at least a portion of an investment as people look at ways to lower their costs without detracting from their ability to earn returns,” Lapedus says.
Besides being aware of what they are paying in an RA, investors should think carefully about their contributions. Ideally, they should be made with a specific plan in mind.
“All too often people know they need to contribute to an RA to increase their retirement savings, but they base what they save on what they think they can afford,” Lapedus says.
“They need to consider the end objective, which is how much I need to secure the income I need in retirement.” In other words, investors need to set a goal.
“If I don’t start with the end in mind, I’m really just firing in the dark,” says Lapedus.
“That is where the role of a financial adviser is so important.”
While advice will always be based on assumptions around inflation, having guidelines is better than nothing at all. An advisor can also adapt clients’ goals as circumstances change.