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By Suzean Haumann*
From March 2019 all retirement funds must offer their members annuity (pension) options that conform to regulations that came into effect in September 2017. The aim of these default regulations is to improve the likelihood that you will choose a pension that will last for the rest of your life.
The regulations affect three important areas of retirement saving: how your contributions are invested while you are accumulating savings, how easy it is to leave your savings invested when you change jobs, and the options you have available to convert your retirement savings into a monthly pension for life when you retire. Members will also receive retirement benefits counselling to provide information and explain the implications of these default options.
Retirees are faced with two choices: choose a life annuity and be guaranteed a life-long income , or go with a living annuity that allows for control over capital, as well as the ability to grow capital through investing in the markets.
Life annuities do not allow access to capital and at death the insurance company keeps the balance of the investor’s retirement savings (unless the option to leave a portion of income to a living spouse is exercised). With a living annuity there is a very real risk of running out of money before the investor dies due to the drawdown percentage being too high. The current advisable drawdown is between 4-5% of your capital.
A hybrid annuity product provides a flexible set of options to balance between self-insuring and being insured for retirement. Many financial institutions now offer such an annuity that conforms to the default regulations, and balances retirees’ need for income security with their desire to leave a legacy to their loved ones. This solution hosts both a living annuity and guaranteed life annuity in your configuration. The future annuity income escalations (from the guaranteed annuity portion), rest on personalised portfolio construction and return results, which allows for flexibility and higher annual income escalation. The hybrid option also provides for partial capital conversion from an existing living annuity at any given time and provides a much more transparent and comparable cost structure.
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The remaining investment capital in a living annuity can still be bequeathed to beneficiaries and the medical underwriting available on some guaranteed life annuities, could now result in a higher monthly annuity income payment, from the insurer.
Let us say an investor’s total retirement savings is fully invested in a living annuity that offers no longevity protection. There is a very real risk of funds running out before death. If the investor had invested 50% of their retirement portfolio in the lifetime income asset class and the other 50% in traditional asset classes such as equities and bonds, more than 90% of their lifetime spending needs should be met.
Sygnia and Allan Gray were some of the first organisations to launch a hybrid product. With this ForLife Living Annuity product Retirement Life handles the compulsory annuity and the asset manager handles the living annuity.
The lifetime income fund pays an income while the investor is alive. This enables advisers to review an investor’s circumstances and, within one product, trade-off, and balance between the competing goals in retirement. Only the percentage allocation between the asset classes and the lifetime income fund that will differ. Investors can choose to have any percentage of the portfolio, from 0% to 75%, invested in the lifetime income asset class, which provides an income for life. The income depends on the performance of the balanced portfolio.
There are drawbacks to hybrid annuities. For example, the rates given for the guaranteed portion is set at the time of purchase, so if you transfer from the living annuity at a later date, the rate might differ from the original rate. It is best to consult a qualified and experienced financial advisor to set up a financial plan best suited to individual needs.
Read more about retirement planning.
- Suzean Haumann is based at Brenthurst Wealth, Tyger Valley. [email protected]
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