Government urged to unlock retirement funds

THIS WEEK, I’ll delve a little deeper into life annuities: pensions provided by life assurance companies that guarantee you an income for life. These products offer a surprisingly broad range of options for retirees. With kind input from Nicola Symons, business solutions consultant at Sanlam, we’ll unpack some of them.

Symons says life insurers offer two broad types of life annuity:

◆ pension payments may be level, increase at a fixed rate each year or increase at a rate linked to inflation (the Consumer Price Index). The underlying investments are predominantly fixed-interest instruments and inflation-linked bonds, Symons says.

◆ the underlying investments may be spread across a range of assets including equities, property and fixed interest. The annuity payments and annual increases are determined by the performance of these assets, Symons says. “Insurers generally smooth out the returns to try to prevent any sharp changes in income from one year to the next. Some insurers may guarantee that the annuity payment will never decrease.”

Conventional and with-profit life annuities have a number of options, such as:

◆ A guaranteed payment term – the minimum term of the annuity payments.

◆ The annual payment increase rate.

◆ Joint life annuities, which include a spouse or other beneficiary as a second annuitant, who will continue to receive payments after the death of the main annuitant. The annuity amount can be reduced after the first annuitant dies.

All of these options will influence your initial income amount, Symons says.

“You should also consider any capital you may wish to bequeath to heirs,” Symons says.

On its own a life annuity does not provide any capital benefit at death. If there is a requirement for capital at death, Symons says, you can consider:

◆ Using a portion of your retirement savings to buy a living annuity (the other broad type of pension product, discussed last week); or

◆ Asking your insurer about a capital protection annuity. “With this arrangement, you will receive a regular income for life and your heirs will receive a lump-sum amount when you die. Your income will be lower, since a portion of your purchase amount will need to pay for life cover. However, this can be more cost-effective than buying life cover separately. There will generally be no medical underwriting on the life cover,” Symons says.

Regarding the protection of your annuity income, Symons says life insurance companies in South Africa are tightly regulated by the Prudential Authority and the Financial Sector Conduct Authority.

“The Financial Soundness Standards (FSS) issued by the Prudential Authority set out prescriptive criteria on the minimum amount of capital an insurance company must hold in addition to the assets it holds to back its policyholder liabilities. This capital must be of ‘sufficient quality and quantity to absorb significant unforeseen losses arising from the risks associated with an insurer’s activities’.

“The FSS also requires that the insurance company must be able to demonstrate that the capital reserve is sufficient to withstand severe market shocks (such as what we have seen in South Africa and across the world as a result of the Covid-19 pandemic).

“This requirement, together with the frequent regulatory reporting insurance companies must provide, is designed to enable the regulator to intervene timeously. This should ensure that action can be taken to protect policyholders long before their benefits would become exposed to the risk of an insurer falling into financial difficulties,” Symons says.

She says that, according to the Association for Savings and Investment South Africa, at the end of last year the life insurance industry held free reserves of more than double what is required by the FSS.

As a result of space constraints, we are unable to publish the unit trust prices. The performance data can be found online at www.fundsdata.co.za/navs

MARTIN HESSE martin.hesse@inl.co.za

EMINENT pension fund and financial planning experts are calling on the government urgently to amend the laws governing retirement funds to allow members access to some of their retirement savings for emergency cash relief during the Covid-19 crisis.

Although the retirement fund industry has always emphasised the importance of preserving retirement savings, the argument is that many employers and employees, whose income has dried up because of the pandemic and lockdown, need money now rather than later to tide them and their businesses over until the crisis has passed.

Personal Finance has received several requests from readers about the possibility of accessing money in their retirement funds.

The total assets in South African pension funds were more than

R4.2 trillion in 2017, according to the most recent annual report of the Registrar of Pension Funds. Releasing 5% of that would provide relief of R210 billion to 17 million fund members nationwide.

A downside of accessing funds at this time is that most underlying investments have lost value during the crisis, and any withdrawals would lock in those losses.

In a recent Nielsen Network video podcast hosted by TV journalist Bronwyn Nielsen, five financial and legal experts co-drafted the following

Twitter message: “Dear (Finance) Minister Mboweni, (SA Revenue Service) commissioner Kieswetter, acting commissioner of the (Financial Sector Conduct Authority) and all pension and provident fund trustees. Please use your power and allow desperate people tax-free access to some of their retirement savings ASAP.”

The participants were pension fund specialist Rosemary Hunter from law firm Fasken; Professor

Alex van der Heever, chair of social security systems administration and management studies at the

Wits School of Governance;

Xhanti Payi, director of Nascence Advisory; Magnus Heystek, director of Brenthurst Wealth Management; and Andrew Crawford, founder of Seshego Consulting.

The group suggested a special relief benefit in the form of a onceoff, tax-free lump sum, which could be either a percentage of the fund credit or a fixed rand amount, such as R100 000.

TYPES OF FUNDS

The emergency measures would differ slightly, depending on the type of fund. There are four types of retirement funds:

In an article “May a pension fund or provident fund lawfully pay special relief benefits to employed members in Covid-19 related financial distress?”

Hunter and her Fasken colleagues Nigel Carmen, Deanne Wood and Johan Coertze argue that there is nothing in the Pension Funds

Act that prevents a fund from amending its rules to provide for a special lump-sum deduction from a member’s fund credit. Such an amount could be tax-free, as it could come off the R500 000 amount you are allowed to take tax-free on retirement. Pension fund trustees would therefore simply need approval from the FSCA to change the fund’s rules (as funds may already have had to do to temporarily halt contributions).

Hunter et al say that, again, although nothing in the Pension Funds Act prevents provident funds from amending their rules to provide for special relief benefits, there may be adverse tax consequences because of the way the term “provident fund” is defined in the Income Tax Act. Thus, in addition to a fund changing its rules, the Income Tax Act would need to be amended by Parliament.

You are not allowed to access any savings in an RA before the age of 55, unless you emigrate. At 55, you can take a third of the accumulated savings as a lump sum, unless the fund value is R247 500 or less, in which case you can withdraw the entire amount. Again, the Pension Funds Act does not prevent an RA fund from paying special relief benefits if its rules provide for them, but the Income Tax Act would have to be amended.

As things stand, you are allowed a once-off withdrawal from a preservation fund before 55. You may therefore immediately make a withdrawal if you haven’t already done so. However, again, because of possible adverse tax consequences, the Income Tax Act would have to be amended.

In the Nielsen Network discussion, another suggestion was that members could take a loan against their retirement savings. This is already permitted in the rules of certain pension funds in the case of buying a property.

Hunter told Personal Finance she did not think a loan was appropriate at present. “We know that the levels of indebtedness in this country are already high, and it is unlikely that many of the fund members who now need early access to some of their retirement savings will soon find themselves in a position not only to resume normal contributions to their funds but also to pay back loans granted to them by their funds,” she said.

When approached for comment on the proposals, the National Treasury’s media division issued the following statement: “Government has been considering the request of early access to retirement savings as a relief measure for members. Various stakeholders, including the regulator, are being consulted in this regard. No policy decision has been made as yet.”