Income at retirement: What are the options?
During his 2012 budget speech, Finance Minister Pravin Gordhan announced proposals to reform the retirement industry, highlighting annuitisation as one of the focus areas. National Treasury released technical discussion papers for public comment, and the paper titled “Enabling a better income in retirement” focused specifically on annuities.
Further retirement reform proposals were published following the Finance Ministers’ 2013 budget speech and left us with the following implications:
• The annuitisation requirements of provident funds and pensions funds will be harmonised
• Trustees will be required to guide members through the retirement process, to identify a default retirement product, and to automatically shift members into that product when they retire, unless members request otherwise
• Living annuities will be eligible for selection as the default product, subject to certain conditions
The increased focus on annuities and in- or out-of-fund annuitisation means trustees and individuals need to improve their understanding of annuities.
Dealing with the jargon
Annuities are products that provide individuals with an income in return for a single premium instalment (in the case of annuities purchased at retirement) or a stream of premiums (in the case of deferred / retirement annuities).
There are two categories of annuities: guaranteed / conventional life annuities and investment-linked living annuities. These product types vary in complexity, but the table below outlines the basic characteristics:
Considerations for individuals
For any number of reasons, living annuities have dominated the South African marketplace for post-retirement products, while conventional life annuities have decreased. Hot topics have focused on incentives for intermediaries as well as the ability to leave an inheritance on death. However, individuals need to be aware that living annuities are complex products and they should make their product selection following an objective assessment of the options available, with suitable advice where possible.
Issues that individuals need to consider include:
• Product complexity – selecting investments, providers, drawdown rates, options and guarantees
• Product charges – platform fees, advisor fees, product fees
• Risks – investment, longevity, guarantees, inflation, drawdown
• Individual needs and circumstances
• Taxation implications
Considerations for trustees
Trustees need to keep abreast of Treasury’s retirement reform proposals and the interventions that it finally implements. Taking due cognisance of their responsibilities, trustees need to apply themselves to developing appropriate default solutions for their members. Default solutions should consider important factors such as:
• Risk exposures that members face in retirement
• Ensuring a broad assessment of all available options
• Accounting for the broad needs of members
• Determining the viability of presenting a selection of profiled default options
• Objectively assessing the viability of in- or out-of-fund defaults
Achieving a positive outcome
Sometimes going with the trend can have devastating longer-term consequences. Individuals need to recognise that we all have differing circumstances and needs. Considering this and using objective advice is more likely to achieve a positive outcome than any other approach.
Trustees will face a similar dilemma on a larger scale. By keeping close to developments in this space as we head towards reform and being pro-active in preparing themselves, trustees will find themselves in a better position to serve their ultimate beneficiaries.
Vuyolwethu Nogantshi is head of institutional sales and consulting at Nedgroup Investments