Offer members what they can afford
Vital element in default strategies, urges Just SA chief executive Deane Moore.
From 1 March 2019, the board of trustees of every pension and retirement-annuity fund must be able to demonstrate to the Registrar of Pension Funds that it has in place an annuity strategy that is appropriate and suitable for its members, taking account of:
- their level of income;
- inflation and investment risks; and
- income protection for beneficiaries on death of the main member.
A member reaching retirement has two categories of needs:
- basic lifetime needs: a monthly income for life for the member and his/her spouse, which grows with inflation, to pay for essential expenses such as food, medical, accommodation, water, electricity, telephone, transport and insurance;
- lifetime aspirations: flexible income for other expenses, tax planning, or to leave as a legacy for beneficiaries.
In South Africa, most people reaching retirement have insufficient savings to consider aspirations. Their priority is to focus on maximising their incomes for life to cover their basic lifetime needs.
There are two retirement options for providing members with a sustainable income for life, where this is expected to grow with inflation: a living annuity or a guaranteed life annuity.
In a living annuity, members need to decide how to invest their retirement savings and how much income to draw from these savings each year. Income is not guaranteed, but the Financial Sector Conduct Authority has published a table to show what proportion of his/her assets a member can draw at each age to have a 90% probability of sustaining their income for life and increasing this with inflation each year. This table was developed by industry professionals and is currently under consultation.
A with-profit annuity is a type of guaranteed life annuity that provides members with a guaranteed income for life that is targeted to grow with inflation each year.
This table compares the income from a guaranteed life annuity and a living annuity on a consistent set of assumptions.
- The guaranteed life annuity rates are for the Just Lifetime Income with- profit annuity.
- The maximum sustainable living annuity drawdown rates published forconsultation by the Financial Sector Conduct Authority on 7/11/2018 in their Draft Conduct Standard for Living Annuities in a Default Annuity Strategy. If individuals withdraw income at these rates, they have a 90% chance of being able to sustain their income for at least as long as their average life expectancy i.e. their income will keep up with inflation until their expected death.
In a living annuity, when the main member passes away, his/her beneficiaries will receive any capital that is left in the living annuity.
In a guaranteed life annuity, members can opt for income to continue for the remainder of their spouse’s lifetime and until beneficiaries are no longer dependent. This is a death benefit that is specifically focused on the ongoing needs of beneficiaries to meet essential expenses.
In surveys carried out by Just in 2015 and 2018, over 85% of retired people said they would prefer a secure, guaranteed income for life against investing a pool of assets and deciding how much to draw each year.