How To Pick A Winning Retirement Annuity
How are you putting away for your retirement?
There are a number of different options available to you for saving for retirement.
One popular choice is a retirement annuity (RA).
These flexible investment vehicles offer tax benefits and encourage regular saving.
But how should you go about picking one?
Here’s a step by step guide to help you pick the best one…
Secure Your Retirement In Four Easy Steps
Winning Retirement Annuity Step #1: Work Out How Much You Need To Save
Before you start scouring the market to find the best RA, you need to work out how much you need to save in the first place.
Of course, this very much depends on your age. The younger you are, the less you’ll have to contribute.
If you’re starting to save in your 20s, you need to put away between 10% and 15% of your salary.
If you leave it until you’re in your 30s, you’re looking at putting away around 20% of your salary.
Leave it until you’re in your 40s, and you’re looking at saving at least 30% of your salary.
To ensure that you have enough money in your savings pot by the time you retire, try to channel in extra cash whenever you can.
With RAs, it’s very easy to make additional contributions, plus you’ll benefit from tax breaks too.
The easiest way to check is to use an online retirement calculator.
Fin24 have a great one, which you can access here.
It takes into consideration a number of factors, including any savings you already have and how long it is before you retire.
From the figures you supply, it will project your future pot and the future value of that cash too. This will go a long way in helping you to determine if you’re going to have enough to live off of.
But one thing is for sure, you can’t underestimate your financial needs in retirement.
It’s always best to aim to provide yourself with a bigger pot than you think you’ll need.
You don’t want to be watching every cent. You want to enjoy retirement.
Winning Retirement Annuity Step #2: Pick The Right Type of RA From The Get Go
Over the years, there have been changes in the RA market. It’s so important that you understand the differences on offer.
There are two basic options of RAs available to invest in:
- Traditional RAs; and
- New generation RAs.
So what’s the difference?
Option 1: Traditional RAs
The basis of these investment products is a legally binding contract between you and an insurance company.
The contract ties you into a number of things, including:
- The length of the contract;
- The fees you’ll pay; and
- Having to pay penalties if you reduce your contributions or transfer out of the contract.
Option 2: New Generation RAs
Investment companies offer these investment products through a LISP (linked investment platform).
Unlike traditional RAs, this type of RA isn’t as restrictive on a contractual basis.
Instead, you can build a portfolio according to your needs using unit trusts.
Plus, there are benefits:
- You can change what you contribute and change to another platform with no penalties;
- The costs are lower;
- And performance of your investment is very transparent.
As you can see, new generation RAs are much more flexible than their traditional counterparts.
With this in mind, when seeking a new RA to invest in, hone in on new generation offerings rather than traditional ones.
Winning Retirement Annuity Step #3: Start To Weigh Up Your Options
Now that you know you’re looking for a new generation RA, the next step is all about finding the best one for you.
The most important consideration when selecting a RA is the associated costs and fees.
Fees have a huge impact on your long-term returns, so it’s vital that you find a RA offering the most competitive fees.
And the good news is, this is getting much easier.
The more established investment houses, such as Coronation and Liberty Life, are now facing fierce competition from new entrants in the market, including 10X and Sygnia.
Instead of relying on actively managed funds, these new entrants focus on using index trackers in their products. In other words, they opt for passively managed funds.
This slashes costs considerably.
Now you may think that actively managed funds gives your capital a better chance of yielding higher returns over the years, but this generally isn’t the case.
Over the long run, fund managers struggle to outperform the market. So you’re paying extra in fees but not seeing a better performance in return.
In actual fact, passively managed funds, where the goal is to match the market’s performance, yield better returns over the long-term.
And all without the high costs associated with actively managed portfolios.
Winning Retirement Annuity Step #4: Get Picking
Taking into account what we’ve looked at above, your best bet is to look for a new generation RA with one of the newer investment companies on the market.
You’ll have flexibility to change your contributions to suit you.
You can take a break from paying into your RA if you need to without incurring any penalties.
But you should only opt for this if you really have to. Stopping contributions will have an impact on your savings goals and will likely extend how long you’ll need to save for to meet them.
You won’t be paying astronomical fees for sub-standard performance.
Opting for passively managed investments within your RA will keep your costs low. This allows your capital to really grow and compound over the years.
The investment company you go with can tailor this all around your tolerance for risk, so you’re completely comfortable.
It’s vital you’re happy with the structure of your RA. Sleepless nights are not necessary.
And this is all whilst benefiting from the tax efficient structure of saving via a RA.
How To Secure Your Retirement In Four Simple Steps
Even if you’ve already started contributing to a company pension or other form of retirement saving product, there’s nothing stopping you from contributing to this type of RA
You can even use a new generation RA to supplement any existing savings.
But if you haven’t saved a cent for retirement yet, they are the perfect place to start.
Remember, you need to:
- First calculate how much you need to save
- Select the right RA from the start
- Weigh up your options
- Invest! Invest! Invest!
And it’s as simple as that.
Until then, here’s to a comfortable retirement.
The Money Lab