To pay a penalty or not?
A client of mine presented a potential dilemma to me. He has a living annuity through Liberty Life but also has the bulk of his living annuity funds on a LISP platform. He was wanting to move the Liberty one to the LISP and consolidate his investments on one platform*.
Under normal circumstances there should be no penalty when transferring living annuities. However, in the fine print, Liberty had noted that there would be an exit penalty if the annuity was transferred anywhere else within the first 5 years of the investment. As such he was advised that he was going to pay a penalty of 1.2% (±R6500) to move his annuity and he balked at the prospect.
We told him to find out from Liberty what the total annual fee on his annuity is and it turns out that they are charging him a total of 2.15% pa (admin and fund fee, no advice fee included – the advisor took that maximum upfront fee).
By comparison his living annuity on the LISP has a total annual fee of 1.1% (fund and admin fee, no advice fee). Do the maths – the 1.2% penalty will be covered in the next 12 months and thereafter he will be better off because of the lower annual fee (less than half of the current annual fee and there would still be a penalty to move for the next 24 months).
The real question I have for him is why anyone would ever invest in a product where there is any kind of exit penalty? There is no need to ever pay penalties when it comes to investing – there are far better (and cheaper) products out there than those offered by the life insurance companies. Stay away from them unless it is insurance you need!
*Note: he pays us directly for advice and there are no on-going advice fees on his investments so the advice we give to him is not affected by the desire to grow assets on which we earn fees.