FIFI PETERS: In this week’s Personal Finance feature, we look at how we can better plan for our retirement, such that we can still maintain our standard of living when we are no longer working. The savings tool that may help us do this is a retirement annuity (RA) – and we get the detail from Jan van der Merwe, the head of actuarial and product at PSG Wealth.
Jan, thanks so much for your time. The most basic definition an annuity is this kind of product that gives you a regular income during your retirement. But tell us a bit more about how it works and when the right time to buy one is.
JAN VAN DER MERWE: Thanks, Fifi, and thanks for having me on your show. In terms of looking at annuities, there are different types available in the market. The one most commonly used in the South African market at the moment is probably the living annuity, which provides you with the option to get the income that you receive with certain regulated minimums and maximums. Your annuity might be linked to the underlying investment performance of the funds that you select. So that’s the one type of annuity.
On the other side of the scale you get large annuities or guaranteed annuities provided by life insurance companies. Even these are provided with a guarantee for the remainder of your life. They also have features such as increasing with inflation, increasing by a fixed amount.
And then lastly, you get a mixture of these annuities on the market side. The hybrid-type annuity is the most common of these is usually referred to as the combination annuity, which provides both an investment component and a minimum guarantee you are provided by the life company.
FIFI PETERS: And when the best time to get an annuity?
JAN VAN DER MERWE: That is a question that’s specific to each individual. So each individual needs to assess their financial circumstances. What’s also key is that the individual then ropes in the help of a financial advisor, and if it’s quite a liquid (living?) annuity, it can be quite a complex state. It’s quite a critical decision as well when coming to retirement age and you are locking into an annuity for years in your retirement. So getting financial advice is very important, considering your own financial circumstances.
FIFI PETERS: For instance, if you still of working age, if you’re still a young person out there, you perhaps even have a pension fund with the company that you’re working for, would it be a good idea for you to also get a retirement annuity on the side?
JAN VAN DER MERWE: That is an option. I think, though, if you want to keep your financial affairs fairly simple, it’s not key for you to get a retirement annuity on the side. I think the key consideration or factor is that you do your best to try and save as much as you can into whatever retirement annuity – whether it’s your employer’s or a separate one –
… save as much as you can, and make use of the tax benefits that retirement savings offers savers in South Africa.
FIFI PETERS: And what are the tax benefits?
JAN VAN DER MERWE: Within a retirement fund, if it’s a retirement annuity or just saving with the employer, all your investment returns and all capital gains, interest, dividends are all tax-free, effectively.
And you also get up to a certain limit, now 27%, of your taxable salary, [which] is not taxable if you put it into a retirement vehicle.
FIFI PETERS: On the opposite end, if you are now approaching retirement age, or in fact if you’ve just retired and you’re waiting for your pension fund to be paid out to you, would it be a good idea to buy a retirement annuity at that stage, and how much of your pension should you be putting in an RA?
JAN VAN DER MERWE: There’s a bit of confusion around terminology. A retirement annuity is a savings vehicle that you use to save while you’re still working. So a retirement annuity is a form of a specific retirement fund, similar to the one at your employer. So you save your retirement annuity, for example, if you run your own business and you are not part of your employer’s fund. You could open up a retirement annuity and when you get to retirement age, you select an annuity which can be either one of those things we discussed earlier.
FIFI PETERS: You may or may not have heard – right now there is a conversation in the retirement industry about the introduction of the state security fund, in which all working people contribute a portion of their income. It’s just something that the state is looking at as a tool to create retirement stability in terms of income, as it were. How does that feature?
JAN VAN DER MERWE: Currently there are a lot of governance initiatives around that, so currently there is a lot of thinking that needs to go into that, and I think until such a stage [when] that becomes effective or the plans are bit more clear, a lot would be happening exactly on that front. It’s important that individuals keep savings to the best of their ability in their own retirement fund, to ensure that they are in a position to retire comfortably.
FIFI PETERS: And then in terms of an RA, what are the main financial risks in retirement, and how do you protect yourself from them?
JAN VAN DER MERWE: One of the key risks probably is longevity. People are healthier these days with medical advances and just leading healthier lifestyles, so that people live longer than anticipated or compared with than in previous years. That’s the one aspect to look out for. The other is inflation. So you’d want your annuity to keep apace with inflation, and the cost of living increase.
So in terms of longevity and inflation it’s important to talk to an advisor and look at what annuity suits you moving forward in terms of all these aspects.
And when you look at a living annuity as an example, it’s important to select the correct underlying investments and that means including some growth opportunities in the underlying fund to ensure that the growth you’re on keeps pace with inflation.
FIFI PETERS: And typically how much do retirement annuities cost?
JAN VAN DER MERWE: The costs are according to the product provided. But I think what’s important there is to just compare the costs when you do start looking at an annuity, the all-in costs in terms of the EAC – the ‘effective annual cost’ – that is published by all product providers. That gives you a good sense of the all-in costs. So that would include advice if you do get an advisor, it would include the management fee, as well as the product provider and the initiation fee. And with all those costs you get a feel for the overall cost [but bear in mind that] you do get different costs between the different providers, and also depending on which fund you select.
FIFI PETERS: And then do you buy a retirement annuity as a single person or by yourself – or is there something that caters for married people?
JAN VAN DER MERWE: The retirement annuity you would buy as a single person, that’s your own retirement savings. Then if you get to retirement [and you then] buy an annuity, certain annuities are offered called a joint life annuity, so your annuity will pay out to you and your spouse, and then when you pass away the annuity or portion thereof continues to be paid to your spouse.
FIFI PETERS: Hmm. And he last savings tip that you can give us? A lot of people, when they change jobs, might find it tempting to access what they had saved so far in terms of their pension contributions. So what would you say to that?
JAN VAN DER MERWE: You make a very good point. It’s very tempting to dig into your retirement savings when you change jobs.
And in these difficult times I would advise people to please not dig into any retirement savings, and keep that pot growing as much as you can.
Like I mentioned earlier, make use of those tax incentives and keep your retirement pot dry.
FIFI PETERS: Thanks so much, Jan. I suppose, as difficult as it is, one always needs to think about the possibility of tomorrow and you don’t want to be in that tomorrow down and out.
That was Jan van der Merwe, head of actuarial and product at PSG Wealth.