What's Happening?

Facebook Twitter Youtube Linkedin

NEED HELP? QUESTIONS@FIA.ORG.ZA

become A FIA member TODAY
member login

Retirement blender

ARTICLE BY

  • Bjorn Ladewig
  • Head of Distribution & Marketing
  • Just SA

SHARE THIS POST

The FAIS Ombud’s theme for the 2021/2022 Financial Year was, “Evolving our services with the future in mind”. And over the last year, the Ombud has focused on increasing awareness of consumers’ rights when it comes to financial advice.  

Financial Service Providers have a responsibility to ensure that consumers are provided with the necessary information to make informed decisions – with or without the help of a financial adviser. While we at Just SA believe this is important throughout a client’s life stages, it is critically important at retirement when they often need to choose between a living and a life annuity. 

In the latest annual report, Adv. Nonku Tshombe states: “In South Africa you have two choices in this regard – a guaranteed annuity, or a living annuity. A living annuity is an investment product that, unlike a guaranteed annuity, transfers the risk and responsibility of securing an adequate income for life onto the shoulders of the consumer.”

Security comes first

According to Just Retirement Insights, many people rank the need for certainty that their retirement income will last as the most important consideration. This is a key feature of a life annuity. However, in practice, many retirees choose to defer annuitisation or not to annuitise at all, which is the opposite of what they articulate as being important, and what is deemed optimal in retirement. 

At retirement, some individuals could be expected to make potentially life-changing decisions about how much income they need each month, for the rest of their lives. And they do not necessarily have the luxury of time to understand their options. 

“And so begins the constant struggle between what is the appropriate drawdown rate and what is the optimal asset allocation that will not only supplement the income drawdown but exceed it to ensure that the annuity remains sustainable in the long term,” Tshombe continues. 

Are your clients in the danger zone? 

The FSCA determined maximum drawdown rates by age band and gender to try preserve sustainability. For example, a sustainable drawdown is considered to be 5.5% for males at age 65, 5% for females at age 65, and 4.5% for a couple aged 65. 

We believe there are three possible scenarios or zones for living annuitants depending on their current drawdown rate, and in relation to the FSCA’s recommended drawdown rate for living annuitants. 

Safe zone: Drawing an income at a sustainable rate. The safe zone indicates that it is highly likely that their drawdown strategy or approach will remain sustainable from an income point of view.

Risky zone: Drawing an income that is above the recommended sustainable rate, but below life annuity rates. The risky zone indicates that income will only remain sustainable if all or at least a portion of the income is secured – or guaranteed – which can be achieved with a guaranteed life annuity.

Danger zone: The danger zone indicates that their income drawdown or withdrawal rate is not sustainable, and they risk running out of money in the future.

 

In a recent study using a large sample of around 10% of the annuity market, we found that 2 out of 3 living annuitants are drawing more than the recommended sustainable drawdown rate. We believe half of these (i.e. 1 out of 3 of all living annuitants) could secure their current income for life, with inflation protection, without having to reduce their drawdown rate.

A modern annuity solution

Just as the Ombud is evolving with the future in mind, so is the retirement industry. New-generation annuity solutions can be tailored to suit an investor’s unique circumstances and risk appetite at retirement. A blended annuity combines the benefits of a living annuity and a life annuity in one investment. This could be a more suitable way to better manage the higher risk of living annuities and the rigidity of guaranteed annuities.

Unlike having two separate products, blended annuities allow you to structure a suitable portfolio over time, balancing the trade-offs of essential and discretionary spending as they arise. For example, you could switch additional tranches into the life annuity component as required to increase the guaranteed income portion as clients age.

Advice is still key

It is vital that consumers understand the different retirement income options available when they retire to protect themselves from rising inflation and reduced purchasing power, and most importantly increase the propensity to cover essential expenses for life. 

Careful financial planning in the years leading up to retirement is important to make sure clients are in the best possible position to choose an income structure that suits their retirement needs. And seeking independent financial advice at retirement is even more important to gain a better understanding of the annuity products best suited to individuals’ circumstances before they make any decisions.

Subscriber Terms and Conditions

  1. APPLICATION OF TERMS
    • These terms and conditions (“Subscriber Terms”) apply to the subscription by any qualifying member of the South African Underwriting Managers Association NPC (“SAUMA”) to the services and benefits offered by FIA Services (Pty) Ltd (“FIA Services”) under the SAUMA affiliation arrangement (“Subscription”).

  2. NATURE OF SUBSCRIPTION
    • A Subscription under this arrangement:
      • does not constitute membership of FIA NPC;
      • does not confer any voting rights or governance participation in FIA NPC; and
      • is governed solely by the contractual relationship between the Subscriber and FIA Services.

  1. ELIGIBILITY
    • To qualify for the Subscription, the applicant must, at the time of application, be a current paid-up member of SAUMA.
    • FIA Services will verify the applicant’s SAUMA membership status with SAUMA prior to activation, and may re-verify such status periodically.
    • If a Subscriber ceases to be a paid-up member of SAUMA, the Subscription will correspondingly be terminated.
    • Applicants are required to authorise FIA Services to confirm their SAUMA membership status with SAUMA as part of the application process.

  1. SERVICES
    • The Subscription entitles the Subscriber to the following benefits:
      • Complimentary access to the FIA CPD Platform;
      • Complimentary access to the FIA Insight Magazine (digital edition);
      • Advertising opportunities on FIA platforms at a discounted rate of 15% (fifteen percent) off the prevailing published rates; and
      • Invitations to attend FIA Technical Webinars annually.
    • FIA Services reserves the right to update, vary or substitute the Services from time to time, provided that the overall value and nature of the benefits remain materially the same.

  1. FEES AND PAYMENT
    • The monthly subscription fee is R260.00 (two hundred and sixty rand) for up to seven registered individuals (Key Individuals and Representatives), and R36.00 (thirty-six rand) per additional registered individual thereafter, excluding VAT.
    • The Subscriber shall provide FIA Services with the required details of each individual to be registered under the Subscription for the purposes of activation and billing.
    • All fees are exclusive of VAT, which shall be charged at the prevailing statutory rate.
    • Subscription fees are reviewed annually in March and may be adjusted with effect from 1 April.
    • Any changes to the Subscription, including but not limited to the number of Representatives and Key Individuals registered under the Subscription, may only be effected once annually during the annual review period in March of each year, with such changes taking effect from 1 April.
    • Subscription fees shall be billed monthly in arrears, unless the Subscriber elects an annual billing cycle at the time of application.
    • The Subscriber shall ensure that all billing information (including contact details, authorised signatories and bank account details) is kept accurate and up to date.
    • Non-payment of subscription fees may result in suspension of access to the Services until such fees are brought up to date.
    • The Subscriber acknowledges and agrees that all subscription fees payable under these Subscriber Terms may be collected by way of debit order, which shall be processed by the holding company, FIA NPC (The Financial Intermediary Association of South Africa), on behalf of FIA Services. Payment to FIA NPC shall be deemed to constitute valid and sufficient discharge of the Subscriber’s payment obligations to FIA Services under these Subscriber Terms.

  1. ONBOARDING
    • Onboarding will be conducted as a Subscription with FIA Services under the SAUMA affiliation arrangement.
    • Onboarding will not confer FIA NPC membership status or any associated rights.
    • Onboarding is conditional on confirmation of the Subscriber’s current SAUMA membership at the time of application

  1. DATA PROTECTION
    • FIA Services will process all personal information in accordance with the Protection of Personal Information Act 4 of 2013 (POPIA) as set out in our POPIA policies.
    • By subscribing, the Subscriber authorises FIA Services to confirm their SAUMA membership status with SAUMA and to process personal information for the purposes of fulfilling the Subscription.

  1. TERMINATION
    • The Subscriber may terminate the Subscription by giving FIA Services one calendar month’s written notice.
    • FIA Services may terminate the Subscription on one calendar month’s written notice, or immediately if the Subscriber breaches these Subscriber Terms and fails to remedy such breach within 14 (fourteen) days of receiving written notice.
    • Termination of the SAUMA–FIA Services affiliation agreement shall not automatically terminate these Subscriber Terms.
    • Termination by the Subscriber shall not relieve the Subscriber of liability for any subscription fees accrued up to the effective date of termination.
    • FIA Services may suspend or terminate the Subscription with immediate effect in the event of non-payment of fees by the Subscriber.

  1. GENERAL
    • These Subscriber Terms are governed by the laws of the Republic of South Africa.
    • Any disputes arising under these Subscriber Terms shall be dealt with in accordance with the dispute resolution provisions contained in the FIA NPC membership terms and conditions, as modified to reflect that the contractual relationship is with FIA Services.
    • Any notices required under these Subscriber Terms may be validly delivered by email to the addresses provided in the Subscriber’s application form, and such notices shall be deemed received on the day of transmission if sent during business hours.
    • The Subscriber may not assign, cede or transfer any of its rights or obligations under these Subscriber Terms without the prior written consent of FIA Services.
    • No variation of these Subscriber Terms shall be of any force or effect unless reduced to writing and signed by both FIA Services and the Subscriber.