New rules should make pension choices simpler

South African money
South African money
Image: www.pixabay.com

Life should get easier for people who find choosing the right pension confusing, thanks to new default regulations.

Since March 1, all pension funds must have a default investment plan, which automatically puts members into a portfolio chosen by trustees.

The new rules also force people, when they resign from their job but do not take the cash or move their savings to another fund, to preserve their capital inside the fund.

If they do not want to do this, they need to inform the fund in writing.

Old Mutual Corporate Consultants head of advice Andrew Davison said this should help improve SA’s high rate of cashing in pension capital, which has reached 90% in the current poor economy.

“For most people, retirement only becomes a reality when they reach 50. A large majority of people, from all income groups, cash in their pensions in their 20s and 30s.”

Up to now, pension funds have washed their hands when members reach retirement.

Members were expected to buy an annuity, or speak to a financial adviser.

It is no surprise that living annuities, in which retirees decide how much of their savings to reinvest in the market and how much they will take as a monthly sum, account for 90% of the annuity products sold.

By contrast, guaranteed life annuities, which provide a predetermined monthly sum that cannot fall based on market performance, barely get a look in even though they provide a more secure income for life.

As it stands, the National Treasury is uncomfortable with the lack of longevity protection in living annuities, in which your capital can fall to the point where it cannot pay an adequate monthly pension.

What mitigates this, to some extent, is that in a living annuity, the reinvested capital can continue growing, which is essential to fund a retirement that could exceed 30 years.

Fund trustee boards are now expected to provide a recommended annuity option for their pension fund members.

Sygnia CEO Magda Wierzycka said these do not strictly default, as members have to opt-in rather than opt-out.

Sygnia has tried to combine the best of living annuities and a guaranteed fund through its Sygnia For Life living annuity.

Wierzycka said that up to the age of 65, people who have this product are 100% invested in the market through a conventional living annuity; at age 66, 10% of the money is then used to buy units in the Sygnia Lifetime Income Portfolio, underwritten by Just SA.

It is a with-profit annuity in which bonuses are determined by the returns from the Sygnia Skeleton 70 Fund, a balanced fund which uses index-based building blocks and is 70% invested in equities.

Every year up to the age of 75, a further 10% of the capital is moved to the income portfolio, but this can be altered.

There are other interesting products out there too. Just SA, run by former Metropolitan Life actuary Deane Moore, is the most active player in the “impaired annuity” space.

It offers a higher income not just for smokers, but also for people who earned lower incomes, as well as underground workers or those with lifeshortening illness.

Alexander Forbes also offers a hybrid of a living annuity and a with-profit annuity, a lowrisk option in which part of the money is invested in the market and a bonus is declared each year based on the performance of that fund.

It seems inevitable that some SA pension funds will opt to make living annuities the default option, but Davison said this would be discouraged.

“To be sustainable, the annual drawdown rate for a living annuity must be no more than 4.5% at age 60 for women, and increasingly modest after that.”

Liberty Corporate’s Braam Naude said it was dangerous to recommend a guaranteed life annuity as the only option.

He pointed out that members cannot switch out of guaranteed life annuities.

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