![]() During 2017 the Minister of Finance issued the final retirement fund default regulations (commonly referred to as “Default Regulations”) made in terms of section 36 of the Pension Funds Act, 1956. These Default Regulations, published in Notice 863 of Government Gazette No. 41064, were the outcome of an extensive consultative process between Treasury and the FSCA (the first draft was published back in July 2015) and intend to improve the outcomes for members of retirement funds by ensuring that they get good value for their savings and retire comfortably. Default Regulations The final default regulations amended existing regulations published back in 1962 and, in essence, introduce three sets of requirements: 1. They require the board of trustees of retirement funds to offer a default investment portfolio to contributing members who do not exercise any choice regarding how their savings should be invested (Regulation 37); 2. They also require the fund to offer a default in-fund preservation arrangement to members who leave the services of the participating employer before retirement (Regulation 38); and 3. for retiring members, a fund must have an annuity strategy with annuity options, either in-fund or out-of-fund, and can only “default” retiring members into a particular annuity product after a member has made a choice. The above listed defaults must be relatively simple, cost-effective and transparent and require the board of trustees to assist members during the accumulationand retirement phases. 1. Default Regulations Regulation 37: Default investment portfolios All retirement funds with a defined contribution category are required to have a default investment portfolio(s). The investment portfolio(s) that members are defaulted into should be appropriate, reasonably priced, well communicated to members, and offer good value for money. Trustees are required to monitor investment portfolios regularly to ensure continued compliance with these principles and rules. Performance fees will be allowed but subject to a standard to be issued by the FSCA and a regulatory or policy review. Loyalty bonuses are not permitted. For now, Regulation 37 does not apply to retirement annuity and preservation funds. 2. Regulation 38: Default Preservation and Portability Funds that have members enrolled into them as a condition of employment (i.e. pension and provident funds), will have to change their rules to allow for default preservation, as some of them currently do not allow resigning workers to leave their accumulated retirement savings in the fund. The employee, however, will have the right and option to withdraw, upon request, the accumulated savings or to transfer them to any other fund, thereby achieving portability. Employees will also be required to first seek retirement benefits counselling before they make a decision. Regulation 38 does not apply to retirement annuity and preservation funds. 3. Regulation 39: Annuity Strategy The boards of all pension, pension preservation and retirement annuity funds must establish an “annuity strategy”. Provident funds and provident preservation funds must only establish an annuity strategy if the fund enables the member to elect an annuity. The regulations define an “annuity strategy” as follows: “annuity strategy” means a strategy, as determined by a board, setting out the manner in which a member’s retirement savings may be applied, with the member’s consent, to provide an annuity or annuities by the fund or to purchase an annuity on behalf of the member from an external provider, which annuity or annuities may either be in the name of the member or in the name of the fund and which complies with the requirements of regulation 39 and any conditions that may be prescribed from time to time”; (my emphasis) In determining the fund’s annuity strategy, the board must consider (as far as it can reasonably ascertain): · the level of income that will be payable to retiring members; · the investment, inflation and other risks inherent in the income received by retiring members; and · the level of income protection granted to beneficiaries in the event of death of a member enrolled into the proposed annuity. The proposed annuity or annuities – which can be a life annuity or a living annuity (and can be either member owned or in-fund) - must be appropriate and suitable for the specific class of members who will be enrolled into them, must be well communicated and offer good value for money. Members will be entitled to opt into this annuity strategy by selecting the annuity product in which they wish to enrol (i.e. the member must indicate which annuity product he/she would prefer by opting in instead of opting-out). Members should also be given access to retirement benefit counselling to assist them in understanding and giving effect to the annuity strategy. With respect to a living annuity, the fund must communicate to members (on a regular basis) the asset class composition of investments, their performance and changes in the income in respect of the annuity. In addition, funds will need to ensure that all fees charged in respect of the proposed annuity are reasonable and competitive considering the benefits provided to members. The fund must review its annuity strategy at least annually to ensure that the proposed annuity continues to comply with the regulations and is appropriate for members. The new concept of “retirement benefits counselling”: what does it entail? The concept of “retirement benefits counselling” is defined in the regulations as “the disclosure and explanation, in a clear and understandable language, including risks, costs and charges…”. Regulation 39 states that members must be given access to retirement benefit counselling not less than three months prior to their normal retirement age as determined in the rules of the fund (and as may be prescribed). It however offers little guidance as to what exactly this service must entail. The FSCA subsequently published a guidance note providing more clarity on (inter alia) the concept of retirement benefit counselling. PFA Guidance Note No.8 of 2018 states that retirement benefit counselling may be provided either in person or in writing. In either event, the fund must retain a record thereof. The person providing counselling (as appointed by the fund) does not need to be a registered FSP or financial advisor in terms of FAIS, but the board must be satisfied that the person who provides the retirement benefit counselling is suitably qualified and experienced and able to properly manage any conflicts of interest. Retirement benefit counselling does not include advice, even on tax matters, and members should be expressly informed of this fact. If advice is also provided, then the person providing the advice must be a registered financial adviser or tax practitioner, as the case may be. It is recommended that retirement benefits counselling should be provided no longer than 6 months prior to a member’s retirement from the fund and the board should make every effort to ensure that the information provided is still relevant and appropriate at retirement age. When members are given access to retirement benefit counselling, a disclosure and explanation must be provided in clear and understandable language, including fees, risks, costs and charges of the available investment portfolios, the fund’s annuity strategy and any other options made available to members. As of 01 March 2019 all default arrangements in respect of a fund must be fully compliant. Funds must therefore ensure that their rules and investment policy statements are properly aligned to ensure compliance with the new default regulations. Source: Personal Finance, Lize de la Harpe a legal adviser at Glacier by Sanlam.
0 Comments
![]() According to a study, 90% of people who retire with money from their retirement funds buy living annuities to provide them with a regular income in retirement. So what are living annuities? And what are life annuities? Are life annuities dead? I would like to explain these two types of products for provision of retirement income. It would be very beneficial for you to generate a more detailed financial plan to give you a better understanding of your options. You can use this tool from 10x. Life annuities and living annuities are the two main products that can provide you with an income from your retirement savings. A life annuity is an insurance-type product and a living annuity is an investment-type product. Each of these meets different needs so you will need to decide which will best meet your particular goals. Life Annuity Life annuity is also called fixed annuity or guaranteed annuity. A life annuity is a contract between you and a life insurance company. You give the life insurance company a retirement capital lump sum. In return, it secures you a pre-determined income for the rest of your life. There are different types of guaranteed annuities. Some provide an income that increases with inflation, others pay a level income and others yet may increase over time, subject to market returns. In order to ensure a level of income that sustains your lifestyle needs, you should consider an inflation-linked life annuity, which provides an income that keeps pace with inflation. Although your income is guaranteed for your whole life, your income ceases when you die. Your heirs won't be able to inherit whatever is left on the death. In other words, the capital dies with the investor. For the sake of guaranteeing value for money, I suggest you purchase a life annuity with an underlying guarantee of income for a minimum period, typically between 10 to 20 years. This period is called a guarantee period. A life annuity with a guarantee period will pay a slightly lower retirement income than one without a guaranteed period. Typically, you also have no say over the initial income and no flexibility to change your income or to move to another annuity or service provider once you've purchased the product. It is wise to use a financial advisor to get quotes from reputable annuity providers, to get the best initial income, terms and conditions. Living annuity On the other hand, a living annuity provides investors with flexibility to choose their income each year (subject to regulatory limits) and where their money is invested. This will give you the flexibility to draw a lower or higher income as and when your needs change. It will provide you with the flexibility to change service providers or purchase a guaranteed annuity at any time. Any remaining capital upon death passes to your heirs. However, in exchange for this flexibility, you take on the risk that the income may not last for your retirement years (on average about 30 years), as well as the risk that their investment returns are poor. This means that your future income could fail to keep up with inflation, or even that you outlive your savings. Below is a table summarising the difference between an inflation-linked guaranteed annuity and a living annuity:
Tax At retirement you may cash in up to 100% of the value of your provident fund, up to one-third of the value of your pension fund, and up to one-third of the value of your retirement annuity. However, there are potentially tax implications to taking a portion in cash. The table below shows you the tax rates for various cash amounts taken at retirement.
In addition to the tax above, the income you receive from either a life or living annuity would be taxed as per the applicable income tax table.
Which one should you buy? There are three possible options: A life annuity, a living annuity, or a combination of the two. Yes, it is possible to deploy your retirement capital to both types of products at the same time. There are two important factors to consider when you buy annuities: Health and flexibility. If you are healthy and your family exhibits a history of longevity, you should consider buying a life annuity with at least part, if not all of your retirement capital, with the balance in a living annuity. People that live longer will score with a life annuity, as they will get (a lot) more than they put in. While the liviing annuity gives you the flexibility to adjust your income as and when your needs change. If you are not healthy, e.g. having chronic conditions such as diabetes, heart conditions, hypertension, you may want to put most, if not all of your retirement capital into a living annuity. This way, you can enjoy the fruits of your years of hard work and savings while still alive, and able to leave the balance to your loved ones when you die. The balance is invested in a life annuity, to provide you with some guaranteed income. With a living annuity, the recommended drawdown rate, the percentage of the capital you draw as income, is 5% per annum. This would ensure the money should last you for up to 30 years in retirement. If you need a higher level of income, you should buy a living annuity, which allows you to withdraw up to 17.5% of your capital as income. Bear in mind that the more you withdraw, the quicker the money in a living annuity runs out. ![]() Delaying saving for retirement is not uncommon. Other life costs seem more important – there’s a wedding to pay for, a deposit for a new house to put down, a baby, school fees and that holiday you absolutely must take. And, even for those of us who have been forced to save (thanks to a compulsory pension fund or retirement annuity deductions at work), it might not be enough. It certainly pays to start saving as early as possible, but if retirement is suddenly closer than you realised and you haven’t saved enough, it’s never too late to start. Make the most of your time It’s not only the amount of money saved that counts, but also when we start saving. The earlier you start, the more affordable the amount of money you need to put away each month will be. More than half of us only start saving at age 28, instead of when we start working. And there are many people who only start in their thirties, or later, when they hit 40. The thing is, it’s not just about “catching up’ savings over the last five/10/15 years that you've missed. That’s a tall order in itself. It's about making up the compounded returns you've completely lost out on! Imagine a saver, Xoliswa, who starts saving for retirement at age 25. (Please note that the following calculations illustrate a point about compounding and time, and do not account for inflation-adjusted increases in contributions.) Saving R5 000 a month, at an average 6% return per year over time, she’ll have more than R7 million by age 60. Mark starts saving at age 35. He will only have R3.46 million at age 60 less than half what Xoliswa saved. To get anywhere close to Xoliswa’s amount, he’ll need to save R10 000 a month to reach R6.9 million in his 25-year investment horizon. Starting even later – at age 45 – and you’re in an even more difficult scenario. Even saving R20 000 a month – four times what Xoliswa started saving at age 25 – won’t even get you to R6 million. That’s why it’s so important to follow Xoliswa’s example and start saving for retirement as early as you can. But even if you’re starting saving late, the most important thing is that you’re starting. How much do you need? Figuring out how much you should have saved is tough. The general rule of thumb in South Africa is that you’ll need to be able to replace 75% of your income to retire comfortably. This assumption relies on the fact that you won’t have a home loan or any other large debt by that age, which means your monthly expenses will be lower. But, increasingly, financial planners are beginning to work on a 90% replacement ratio (especially since medical expenses tend to rise after retirement). Assume you’re retiring today with a final salary of R40 000 a month (R480 000 a year). To replace 90% of your salary, you would need R10.8-million saved to maintain your standard of living (note that this amount also takes account of the 4% rule, which we will discuss in more detail in a later article). Most people will be very lucky if they have three-quarters of that. Boosting your savings So, if you’re nearing retirement and you’ve come to the conclusion that you need more savings to retire comfortably, you need to consider the following points:
To start saving for your retirement, please contact Kevin or Ray, email: [email protected] tel no: (011 658-1333) Source: Discovery ![]() Around this time of the year, we would like to remind you to consider topping up your retirement annuity fund. Discovery is one of our preferred providers for Retirement annuity and it makes your life easier for you by:
Your contribution must reach Discovery by 28 February 2018 for your investment to go through before the end of the tax year. For more information on the Discovery Retirement Plans, please respond to this mail so that I can arrange an appointment with you. To top your retirement annuity , please contact Kevin or Ray, email: [email protected] tel no: (011 658-1333) Source: Discovery ![]() Never underestimate the power of being clued up and learning the basics of retirement speak. These terms should get you off to a good start: Provident Fund If you are working for a company, you’ve probably heard of this one. It is a compulsory saving tool set up by your employer. Your contribution is taxed, but your employer’s isn’t, so often the employer makes the contribution on the employee’s behalf. At retirement, the fund’s benefits are fully available in cash once the tax has been paid. Retirement Annuity This is similar to a provident fund but is a retirement-saving vehicle largely used by self-employed individuals or those without a provident fund option at work. There is a tax saving, as contributions are subtracted from your gross annual income before tax is calculated. At retirement, only a third of the capital can be taken as a lump sum. The remaining two thirds must be used to purchase a compulsory annuity product such as an investment – linked living annuity or life annuity. Fund benefits can only be accessed at retirement (usually after the age of 55). Preservation Fund If you’re planning to change jobs, this is definitely one to remember. Preservation funds are literally meant to preserve capital. There are two types of preservation funds: a pension preservation fund and a provident preservation fund. If you belong to a pension fund: On resignation, you can transfer your funds to a preservation pension fund. No tax is paid when the money is transferred and the fund allows for a single withdrawal of any capital prior to retirement. At retirement, a maximum of one third of your capital can be taken as a cash lump sum, while the remaining two thirds must be used to purchase an annuity. If you belong to a provident fund: On resignation, you can transfer your funds to a provident preservation fund. No tax is paid when your money is transferred, and the fund allows for a single withdrawal of any capital sum prior to retirement. At retirement, the total capital can be taken as a lump sum, or you can use the cash to purchase an annuity. Defined-benefit retirement fund This is a traditional pension fund that considers, among other factors, the number of years you have been part of the fund and your salary at retirement, to define the benefits accrued. The advantages are that you don’t take on the investment risk, and you can calculate the exact amount you receive at retirement (that is a percentage of your final salary). The downside is that your pension may not keep pace with inflation because increases in contributions and benefits are at the discretion of the fund’s trustees. There are not many of these funds around today because most companies have moved over to defined contribution funds over the past few decades. Defined contribution retirement fund Contributions to this fund are paid by the employer and the member but, unlike a defined benefit retirement fund, the amount of money you receive on retirement is not guaranteed. The member decides where the fund invests their contributions and takes on the full investment risk. If the markets yield good returns, you may have a much higher pension at retirement but if they do poorly, you could stand to lose. To get an appointment with our Financial advisor to discuss the different options, please contact Kevin or Ray, email: [email protected] tel no: (011 658-1333) Source: Sanlam Many people have negative perceptions about retirement annuity. I must state categorically that this is a powerful tool in any investor’s financial and tax planning. A retirement annuity is a long-term investment structure for building retirement savings, either on a recurring basis or by making a lump sum investment. A retirement annuity offers significant tax advantages to people who are committed to investing their money until they are at least 55 years old. A portion of your retirement annuity contributions is tax deductible. The current legislation allows you contributions to retirement funds of up to 27.5% of your taxable income as tax deduction, subject to a maximum of R350,000 in a tax year. All your investment growth, including interest, dividends and capital gains within a retirement annuity is tax free.
At retirement age, you may withdraw a portion of your retirement annuity account tax free. Currently the first R500,000 lump sum benefit is tax free. The balance of the account will be used to purchase a fixed annuity or living annuity, to give you a monthly income. You can select the underlying investment portfolios in a retirement annuity. These investment portfolios are compliant with Regulation 28 of the Pension Funds Act, to ensure your money is invested prudently across a number of asset classes. Before retirement, there are three scenarios where you may access money in your retirement annuity account: In the event of your death, the money is paid out to your beneficiary. In the event of ill health and you are unable to work, you lodge a claim for a disability benefit – and not a withdrawal benefit – from your retirement fund. When you emigrate or when you leave South Africa due to an expired work visa, you can withdraw the full value in cash (subject to tax). There are two types of retirement annuity products: Life assurer retirement annuity and unit trust retirement annuity. With a life assurer retirement annuity, you enter into a contract to commit to pay contributions until your selected retirement age. Should you reduce or stop contributions during the first half of the term, you will pay a penalty charge, which reduces your retirement annuity account value. Some life assurers will reward you with bonuses paid into your account for being disciplined with your monthly contributions over the term of the contract. While a life assurer retirement annuity is rigid, a unit trust retirement annuity gives you flexibility. You may increase, reduce or stop contributions at any time without penalties. You may wish to consider investing in a retirement annuity fund if:
A word of advice: If compound interest is the first Financial Wonder, then I consider retirement annuity to be the second Financial Wonder in South Africa. This group of unit trusts typically has a relatively high weighting, up to 75% of the money, invested in the stock markets, or equities. Most balanced (or known as multi-asset, high-equity) unit trusts invest according to Regulation 28 of the Pension Funds Act, which means up to 75% of its money invested in equities, up to 25% invested offshore, up to 5% invested in Africa, with the balance invested in bonds, money market and property. It may have some exposure to precious commodities such as gold.
Generally this group of unit trusts invest its money for retirement fund members in South Africa, so it is fairly moderate in its risk management approach. It would not want to risk people’s retirement savings. It invests in quite a number of different assets and different companies to diversify. Return profile: Expected higher returns over the long term (5 to 10 years plus), on average 8% to 12% per annum. Volatilities: As stock markets fluctuate, reacting to news and market sentiments, balanced unit trusts also fluctuate daily. It goes up one day, down the next. It goes up one month, maybe down the next. However, the price movements are muted compared to High Growth Unit Trusts. Who is it suitable for:
|
AuthorKevin Yeh Archives
January 2025
Categories
All
|