In a recent interview with National Treasury, the concern was that most of us are not saving our retirement funds when we change jobs. The discussion pointed to fees and the impact the costs have on returns. Fees were singled out as the reason why people are not saving. Perhaps the problem is deeper. We are living beyond our means with the notion that “it will be alright on the night”, so let’s just take care of it now.
Unfortunately, debt does go away by itself. It is far easier to prevent than to cure. I believe it is all about the attitude which starts with a sound financial plan.

Let’s take a look at how fees are applied to investments.

The reality of fees on investment products. When choosing an investment be aware of the pros and cons. It’s about horses for courses. Here are some things to consider:

The period of the contract
Contracts bind you to a predetermined period. The longer the term the more unlikely you are to keep up with the investment.
Let’s face it. It sounds like a great idea to take out a policy for the next 20 years. It gives you the idea that you will be forced to save for that period of time and at the time you probably think that it is quite feasible to keep up with the premiums. However, things get in the way.
Life-changing events:
Getting married
Buying a house
Buying a car
Having children
Unforeseen life-changing events such as:
Losing your job
Death
Disability
Getting divorced

If you stop paying your premiums on traditional policies the cash value before the contractual period is over, you will be charged by having your cash value adjusted to the amount that the service provider would have made on fees to the remainder of the term. These policies have the advantage of providing benefits such as premium waivers at death and disability. Again, you pay for these out of your premiums, which means that for the R100 you invest, you may only have say, R80, invested (depending on age and health), for the assurance.

Policies, as with most other investments, have three main fees:

Admin fee – generally, 0.5% of the value of the policy fund
Asset manager fees – generally, 1,5% of the fund
Advisor fees – 0,5% of the fund value

If the policy is a traditional one then these fees are advanced up at a discounted rate depending on the term of the policy.

If a ‘new generation policy, then these fees are deducted from each premium and the balance is then allocated to the investment.
Example:
R100
Less admin – 05%, less 0,5% for the advisor, less 1,5% for asset manager = 2,5%
Which translates to an R97,50 allocation to your investment.

If you stop this type of product then there are no penalties because the service provider has not advanced any fees in the form of commission.

It it therefore a trade-off between:
your probability of keeping up with the policy for the duration of the term and adding benefits