How new pension rules could affect how much you can draw as an annuity
The Financial Sector Conduct Authority says a sustainable income level might result in a monthly pension below the amount a retiree needs
The retirement fund regulator has released draft rules around what percentage of your retirement savings you can draw as an annuity if at retirement you opt for a pension chosen by your retirement fund trustees.
The Financial Sector Conduct Authority (FSCA) has released a draft conduct standard proposing new maximum drawdown rates determined by age band and gender for default annuities or monthly pensions offered by funds. For example, a man at age 65 will be able to draw a maximum income annually of 5.5% of his retirement capital and a woman of the same age 5% in a default annuity.
New regulations under the Pensions Funds Act, which take effect in March next year, oblige all pension, preservation and retirement annuity funds to establish a default annuity strategy for retiring members.
The standard will guide your fund on how to ensure you draw a sustainable income when you use investments in a living annuity to provide an income. It obliges funds to monitor drawdowns and retirement capital and communicate regularly with you, as a retiree, to allow you to consider alternative actions when you are in danger of being unable to maintain your income.
The amounts proposed in the standard are lower than the average amount drawn by South African living annuity policyholders, which, according to the Association for Savings and Investment South Africa (Asisa), was 6.64% in 2017.
In terms of the Income Tax Act, living annuity policyholders can draw a regular income of between 2.5% and 17.5% of the value of their living annuity capital each year. However, when the percentage of income drawn exceeds the real returns of the investment portfolio supporting the living annuity, it will erode your capital over time, Taryn Hirsch, senior policy adviser at the Asisa, says.
A pensioner drawing an income from a living annuity is exposed to the risk of their retirement savings been depleted too soon, poor investment returns on the capital, a sequencing of returns that works against you while drawing an income and excessive product fees and charges.
Retirement fund trustees can choose to provide you with an annuity from within the fund or to outsource the pension to a financial institution. You can also elect to take your retirement fund payout and purchase an annuity from the financial institution of your choice, but funds are likely to be able to secure lower fees for their default options.
Your retirement fund may offer you a living annuity or a guaranteed life annuity — one that guarantees a set pension for life but may not leave any residue for your heirs or a combination of or choice between the two as a default at retirement.
According to the draft Conduct Standard, the board of trustees’ chosen default annuity strategy for a fund must represent the fund’s best proposal for the average member of that fund who is not comfortable making their own decision about which pension product to use at retirement. The best proposal may, according to the draft Conduct Standard document, be different for different categories of members.
The FSCA regards an income as sustainable if the annuity can continue to pay it with inflation-related increases over the expected lifetime of the pensioner.
The FSCA says a sustainable income level might result in a monthly pension below the amount a retiree needs.
The draft standard says the sustainability of the income must be measured regularly and communicated clearly to retirees both at inception of an annuity and on a regular basis thereafter.
“While the prescribed drawdown limits are lower than the limits permissible in an industry living annuity, retiring members have the option to choose their own annuity, should they feel that the default is not appropriate,” the FSCA says.
The draft Conduct Standard is expected to lead to improved outcomes for pensions, the FSCA says.
Commenting on the proposed standard, Hirsch says the industry was not expecting the regulator to impose maximum drawdown rates for living annuities, but she understands that the regulator is trying to protect consumers from a risky and potentially expensive product that could leave them with little to no retirement income.
The draft Conduct Standard is open for public comment until January 14 2019.