Although the life assurance industry has done a lot to clear up the industry of its rogue financial advisers, a lot more needs to be done to combat a practice that still rears its ugly head at times, namely the extension of the term on a retirement annuity policy to its maximum of 69 years.
This practice was more common in the past as many such advisers are now finding it harder to slip these malpractices past better-educated clients.
But many people only find out how they were given bad advice in the past when they mature their retirement annuities (RAs) at an age earlier than the maturity date specified on their application forms many years ago. According to legislation, retirement annuities can be matured at any time between the ages of 55 and 69 years and 11 months.
The best option for someone taking out a retirement annuity with a life assurance company is to indicate that they wish to mature the policy at the age of 55. This does not mean that the policy has to mature at the age of 55, as at that time the investor can choose to extend the life of the policy indefinitely.
In doing so the investor not only creates flexibility for when he or she wishes to retire, but it also means that the lowest costs and commissions are deducted from the policy. It is the best option for the investor as more is left for investment purposes.
However, what was fairly common in the past was that it was left to the investment adviser to fill in the retirement date on the application form. And it was at this point that the less-than-straight advisers would take the gap and fill in the retirement as being 69 years.
The ill-educated investor had no understanding about the implication of the term and was often also duped into believing that it did not really matter. But it did and still does, as any surrender earlier than the original maturity date on the document leads to early cancellation penalties.
Precisely how much this costs investors is hard to determine as each insurance company has a different policy with regards to early surrenders. But the bottom line is that any penalty would be for the account of the investor.
To work this out you would need to be at least an actuary and even then it is still not an easy task. So what chance would the average member of the public have in trying to establish just how much someone else's bad advice has cost them in terms costs, fees and penalties? Not much I would guess.
And don't think that you have to be absolutely stupid to be taken in by the ruse that "you can mature your RA whenever you want to". My first RA taken out many years ago was E you guessed it, one that matures at the age of 69.
The best route to go when you are taking an RA with a life assurance company is to specify that you want to mature the policy at age 55, even if it is not your intention to retire then.
You can choose to mature your RAs when it suits you. You can also mature one or all of your policies at the same time, or you can stagger the maturity over a couple of years to suit your particular needs.
There is also a misconception that you have to mature your RAs with the company that you have had your RA with. At the time of maturity you have complete freedom to place your RA capital with any company. This is especially relevant when it comes to buying an income for life.
Not all life assurance companies pay the same annuities and it is up to either you, or the financial adviser handling this on your behalf, to shop around to buy you the best income available on the market.
Most investors simply mature their RAs without thinking of shopping around. This also applies to investors who wish to invest their proceeds into a living annuity, which is a totally different type of investment to a purchased annuity.
One last point; you can also choose to purchase an RA with a unit trust company. Here you do not have to consider the term as the fee structure works entirely differently. Fees and commissions on a unit-trust-based RA are deducted on a contribution basis and it makes no difference whether the maturity age is 55 or 69. So if you are taking out an RA with a life-assurance company, which can come with life and disability cover, unlike a unit-trust based RA, make certain that the maturity date is given as 55 years.