Many South Africans are suffering a reduction of income, some even losing their jobs due to the lockdown following the Covid-19 pandemic.   There are a variety of ways that this will impact investors.

Investors will have exposure to paying the rent or home loan instalments,  food bills, keeping insurance premiums up-to-date, medical aids,  savings and retirement contributions, investment funds and foreseeable cash flow requirements and all these factors must be carefully considered going forward.

It is however a good time to invest, should one have surplus funds and be able to.  World markets have lost significant value – shares are now cheaper than pre Covid-19 lockdowns.  Amounts invested now will buy more units than when markets were stronger, and their value will grow as the markets recover.

However, many investors are just not able to continue paying into their existing investments. They may elect to” pay up” a policy, ie: stop contributing to it, or perhaps move to another provider that gives better value in terms of fees charged and/or returns.

It would be prudent to remember though that some investment house will levy a penalty charge should one decide to stop contributing or move ones’ savings to another provider.

For most investors, the idea of taking another knock in terms of the penalty levy for moving funds, on top of the decreased value of one’s retirement funds is not an option. However, they must bear in mind that taking a hit upfront may be advantageously compensated for over the remaining term of the investment.

  • Paying high fees, especially for average returns over the life of ones’ investment, can often do more damage than a once-off levy. Essentially, an investor could end up with more money in the new investment even after paying a levy to transfer to a low-cost provider.
  • One will generally pay the value of the termination levy over the remaining term of the investment even if one doesn’t move to another investment house with lower costs.

The aim of penalty fees is to deter investors from switching investment houses, and essentially covers the “sunk costs” ie: sales commission and processing new business. These costs however have already been incurred and have to be paid regardless: and are then either recovered from the investment over the years, or via a termination/penalty fee.  Investors should however have the choice and freedom to move investments or funds to another investment provider should returns be average or below average and/or fees are excessive.

The decision to switch funds or investment houses due to lower costs must be very carefully considered though as investment returns and client interactions also play a role in the decision apart from keeping costs down.

https://businesstech.co.za/news/wealth  (Brett Mackay, Investment Consultant at 10X Investments)