The value of good advice on your retirement benefits
Once you have bought a guaranteed life annuity you cannot move to another annuity
You should definitely consider the cheaper pensions that your retirement fund can secure for you but also take care not to make your choices without proper financial advice that takes into account all your savings and your circumstance, as many retirement decisions are irrevocable, the South African Independent Financial Advisers Association warns.
At a recent SAIFAA seminar, Derek Smorenburg, the founder of the independent adviser association, said when you consider an default annuity option offered by your retirement fund it is in your best interests to engage an independent financial adviser to ensure that you get comprehensive holistic and ongoing analysis and advice that takes into account all your assets and liabilities, and not just the amount that you have saved in your retirement fund.
Regulations under the Pensions Funds Act oblige funds from March next year to provide you with an annuity chosen by your trustees as the default pension. These same regulations also oblige funds to give you retirement benefits counselling – information, but not advice - about, among other things, the pension options open to you at retirement.
Smorenburg says you can paint yourself into an irrevocable situation if you get the wrong advice at retirement.
Once you have bought a guaranteed life annuity – a pension that guarantees to pay a predetermined pension for the rest of your life - you cannot move to another annuity. If you buy a living annuity – an investment portfolio from which you draw a percentage as a pension each month that is dependent on the returns you earn in the market - you can switch providers and/or convert your annuity to a guaranteed annuity, but only in full – not just a portion of it, the seminar heard.
Smorenburg says if you choose a living annuity or a hybrid guaranteed for life and living annuity your decision is not a once-only one, one on which you will need to continually have access to ever-changing advice.
Daniel van Andel, a product development manager at Allan Gray, agrees that retirees should be made aware that retirement benefits counselling may be inadequate under certain circumstances, and that some people may be better off speaking to a financial adviser who is better positioned to take all aspects of their financial situation into account when recommending an appropriate plan for retirement.
Barend la Grange, an actuary at Sanlam Employee Benefits, says Sanlam expects more people will get advice on their annuities as a result of the information they get from benefits counsellors. The counsellors will make them aware of their options but for advice on which are suitable they will need an adviser.
He says one employer has asked Sanlam to contact all the members of its employer-sponsored fund who are due have not saved enough to guarantee a good pension – they have low income replacement ratios relative to their current salaries – and alert them to their predicament and the action they can take to remedy the situation.
La Grange says although the regulations will only require funds to offer retirement benefits counselling from March next year, Sanlam already has it in place on its umbrella fund and has seen the number of members making use of trustee-endorsed annuity strategies doubling.
He says if members need advice instead of just the counselling the fund can provide, funds can decide whether to refer members to a panel of trustee-approved advisers or to make use of the Sanlam’s salaried retirement benefits adviser.
Retirement benefits counselling is causing funds to rethink their communication strategies with members, he says.
Sanlam has developed a robo-advice tool, RetireMate, for members of its funds.
Katherine Barker, head of Funds at Work, says Momentum also has a tool, Smart Counsel, that members and their advisers can use to improve their understanding of the consequences of their choices at retirement and encourages members to work with their advisers.
SAIFAA has asked the eight biggest umbrella funds whether they will enable members to appoint financial advisers to assist them with default annuities.
Questions you should ask
Smorenburg, says the questions you, as a member, or your adviser, should ask about the default annuity options your fund provides include:
- What is the range of investment portfolios offered under the infund default living annuity product offering;
- What is the format and range of life annuity and hybrid options
- What are the total costs of these default in-fund member options including administration fees, asset management fees, performance fees, capital guarantee fees and whether these costs at institutional or retail levels;
- What are the competitive advantages of the default in-fund member option.
The Association of Savings and Investments of South Africa had introduced a new measure, the effective annual cost, to help you compare the costs of products like annuities across providers.
It has extended the EAC to umbrella funds but funds offering in-fund annuities are not yet required to provide an EAC for these pensions. Retirement funds will be required to make full disclosure on their costs but as this disclosure is not yet standardized across providers, comparisons may still be difficult.
If your fund’s default annuity is one that is outsourced to a financial institution or the umbrella fund’s sponsoring company, however, you should be provided with the EAC when you obtain a quote.