SIKI MGABADELI: We focus on retirement today, trying to ensure that you look at your options quite carefully today, focusing on annuities in retirement, looking at living annuities and fixed or guaranteed annuities. The decision, of course, of whether to select a living annuity or a guaranteed one in retirement can only be done on the individual level, taking the retiree’s circumstances into account.
Today we are looking at living and guaranteed or fixed annuities. We are talking to David Lloyd, who is managing director for innovation at Liberty. David. thanks for your time today.
DAVID LLOYD: Good afternoon.
SIKI MGABADELI: What is the difference between a fixed and a living annuity?
DAVID LLOYD: I guess really the answer is in the name. With a fixed annuity you know exactly what you are going to get, and you know that you’ll carry on getting it until you pass away.
With a living annuity it’s really just a pot of money that remains invested and what you get depends on how well your investments do and actually for how long you live.
SIKI MGABADELI: Again, all of this comes down to how long you live, doesn’t it?
DAVID LLOYD: Yes, which means it’s a very difficult choice to make, very difficult.
SIKI MGABADELI: So what do you then do? How do you decide?
DAVID LLOYD: Panic!
SIKI MGABADELI: [Chuckling] I’m panicking now and I’m nowhere near retirement.
DAVID LLOYD: First and foremost, hopefully by the time you come to retire you’ll have found yourself a financial advisor with whom you have a good relationship. And so my first point would be you’ve got to take advice on something like this. It really is very, very complicated. The only other point I would make, based on my experience, is that people have a tendency to underestimate however long they are going to live in retirement. So if you look at the stats, and you ask people, you actually get two different pictures. And I’m afraid the stats win out and people are living longer.
SIKI MGABADELI: Absolutely. Changes in medical technology mean that these days we do live much longer. So you’ve got to take that into account.
Tell us a little about Bold, then. What is Bold?
DAVID LLOYD: More and more people in South Africa are preferring to go down the living annuity route. They like the idea that you have a lot more control. You see, with a fixed annuity – although you know exactly what you are going to get – when you die the whole thing ends. So you have no control but to pass everything over to insurance companies – they take all the risks. But obviously they then also take the rewards.
So more and more people are finding that when they come to retire and they look at what a fixed annuity will give them, they are going to wonder, do I really want to live on that amount? You can have all the certainty in the world, but I’m almost locking into a lower lifestyle in retirement than I was expecting. So they almost feel they have to go the other route.
Now the advantage of the other route is everyone knows the stock market is the place to be for a long-term investment in terms of getting growth. We have lots of great funds in South Africa, and lots of great fund managers. So you think, okay, why am I saying you need advice? Surely it’s very simple. I go down the living annuity route, I go to an advisor, and between us we pick the range of funds. End of the matter.
Well, the problem is the stock market has this nasty habit of wanting to surprise us every now and then.
SIKI MGABADELI: Doing what it’s been doing the past three years.
DAVID LLOYD: Ja. Imagine now, this pot of money represents my retirement lifestyle. So I simply ask the question: if there is a downgrade, if there is a problem with a bank in South Africa, or anything else, and it surprises the stock market, and the stock market doesn’t like the result of that – and let’s say the price of all our top companies in South Africa drops by 30% – does my pot of money drop by 30%? If the answer is yes, you must admit that’s a pretty scary prospect.
So what people tend to do is they go, okay, well I still like to have a living annuity, I like to have the control, I like the fact that when I pass away if there is some money left it can go to my estate, to my heirs – so I am leaving something behind. But what I’ll do is I’ll invest more conservatively. Remember, risk and reward are effectively two sides of the same coin. In other words, less risk, okay, that means less reward. So what you are doing there is you are getting more and more towards the return that the fixed annuity would have given you.
Now the whole point of going down a living annuity route is that with a fixed annuity effectively the insurance company invests in bonds only, and not the stock market. So how living annuities can outperform a fixed annuity is by being in the stock market. But actually at the time of making that decision, unless I’m very lucky and happen to have a holiday home in St Francis, and my children are now entrepreneur millionaires in South Africa, maybe I’m not quite so worried. But sadly for the majority of the population that doesn’t apply and what happens is, in the research we saw, the customers are actually more and more conservative with their fund choices, and therefore they are going to get less and less growth.
So with this Bold Living Annuity we set out to solve that problem, that customer pain point.
SIKI MGABADELI: Do you take away…
DAVID LLOYD: You have to think of it very much from a customer’s perspective. Given what I’ve just described to you, I would say how would you want it to work? And you go, well, the whole point of a living annuity is I can choose between 100 funds from 15 asset managers, so I don’t want to lose that. Can I please have the flexibility to do that and change my mind whenever I need to, when different funds are doing better and worse. So we go okay, tick, we’ll do that.
Now you are telling me I should be in these higher-performing funds, in fact the top performing funds. But those tend to be the riskiest ones. So what are you going to do about that?
We said, okay, why don’t we have what we call a high watermark guarantee. All that means is we look at the funds you’ve chosen, we look at the return they’ve produced every quarter, and if it sets a new high in any one quarter, the guarantee ratchets up. It can never go down, it can only go up. That’s why it’s called a high watermark.
If you think of your bath, every time you fill it up, you push the little dirty stain a bit higher. And when you let the water out, the stain remains. That’s it’s called a high watermark. Think of the same thing.
But still, with all the flexibility that I can even change the funds, I can get into a riskier fund when I want to. You don’t tell me, no, you are not allowed to do that or that you are going to suddenly charge me more.
SIKI MGABADELI: There’s a lot more control as well for the investor, because I think we want people to be actively involved in their retirement…
DAVID LLOYD: Yes. So what we are trying to do is simply get people to be able to take advantage at the top-performing funds and not be quite so worried or have quite so much discomfort about the risk because of this increasing return.
It’s as simple as that. There is really only one other consideration, and people listening to this might go, okay, that’s sounds great but how much are you going to charge me for this magical guarantee? If you charge me a huge amount of money, is it really worth it? In essence what we try and do is we say, look, we really want people to be able to invest in those higher-performing funds so they’ll get higher rewards, so we say we’ll take a share of those higher rewards – only if you get them – to pay for the guarantee. And the share we take is 20%.
So how it works is we set this thing called a target return, which is 14% a year, and we say we’ll only take 20% above 14% each year. If you don’t get 14%, we’ll take nothing. If you get, let’s say, 15%, then we take 20% of 1%, so it’s 0.2%. That’s all we charge you that year for the guarantee.
SIKI MGABADELI: I see. So it’s above the 14%.
DAVID LLOYD: Look, we also make a once-off 1% at the beginning of the period, but that’s it. It’s not only the guarantee that’s innovative because no one has ever put a guarantee on a fund supermarket. We call the Lisps [linked investment service providers] in this country – I hate jargon. We were talking before about nick-nacks and now lisps, but for me I think fund supermarkets are a platform where I can choose funds.
We allow people that choice and that flexibility. We put the guarantee on it. We’ve been quite innovative in the way we charge for the guarantee.
I think the other important point to make is that the guarantee applies to your income withdrawals, and you can change the income withdrawals. So let’s say, your funds drop below the high watermark, we don’t say to you no, no, no you can’t increase your income, because at that point if for an income you are selling some of your investments, you’d be selling them at a sort of a loss. But we make up the difference to the high watermark. So we have complete flexibility we don’t change anything. Every year you can change the income, every day you can change the funds if you want to. It doesn’t affect what we charge you, it doesn’t affect how the product works. So it’s actually very, very flexible.
SIKI MGABADELI: We’ll leave it there. Thanks for your time today. David Lloyd is managing director for innovation at Liberty.
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