What you need to know about pen­sions of­fered by re­tire­ment funds

DIF­FER­ENCES BE­TWEEN IN-FUND AND OUT-OF-FUND LIV­ING AN­NU­ITIES

Saturday Star - - P E R S O N A L F I N A N C E - | mar­tin.hesse@inl.co.za

THE De­fault Reg­u­la­tions, which be­come ef­fec­tive for all re­tire­ment funds from March next year, re­quire every re­tire­ment fund to de­velop a trustee-en­dorsed an­nu­ity strat­egy. By us­ing their scale and bar­gain­ing power, big­ger re­tire­ment funds can po­ten­tially of­fer more cost-ef­fec­tive an­nu­ity so­lu­tions to re­tir­ing mem­bers than cur­rently avail­able re­tail an­nu­ity prod­ucts, although the dif­fer­ences are ex­pected to nar­row as providers adapt to the chang­ing re­tire­ment land­scape.

In a pre­sen­ta­tion at the re­cent an­nual con­fer­ence of the Ac­tu­ar­ial So­ci­ety of South Africa in Cape Town, David Gluck­man and Danie van Zyl, re­spec­tively head of spe­cial projects and head of guar­an­teed in­vest­ments at San­lam Em­ployee Ben­e­fits, ex­am­ined the ad­van­tages and disad­van­tages of in-fund liv­ing an­nu­ities ver­sus re­tail liv­ing an­nu­ities for re­tir­ing mem­bers.

Gluck­man said that although there was still a de­mand for guar­an­teed, or life, an­nu­ities, there has been a huge move among re­tir­ing

MAR­TIN HESSE

South Africans over the past sev­eral years to liv­ing an­nu­ities. (A life an­nu­ity is a pen­sion prod­uct you buy from a life as­sur­ance com­pany, which pays a pen­sion for life. A liv­ing an­nu­ity is an in­vest­ment prod­uct in which you can choose the un­der­ly­ing in­vest­ments and the amount you draw down as a pen­sion each year. How­ever, you risk run­ning out of money be­fore you die.)

Gluck­man says boards of trustees can choose any an­nu­ity prod­ucts to be part of the trustee-en­dorsed an­nu­ity strat­egy. “Op­tions in­clude both liv­ing an­nu­ity and life an­nu­ity prod­ucts, or hy­brid life/liv­ing an­nu­ity so­lu­tions, or com­bi­na­tions, such as a life an­nu­ity for one seg­ment of mem­bers and liv­ing an­nu­ity for an­other seg­ment. All of th­ese can ei­ther be struc­tured on an In-fund ba­sis or an out-of-fund ba­sis,” he says.

In ad­di­tion to the dif­fer­ences in le­gal struc­ture, hold­ers of in-fund liv­ing an­nu­ities are likely to pay less in ad­min­is­tra­tion, ad­vice and in­vest­ment costs.

Says Gluck­man: “It’s de­sir­able that fi­nan­cial ad­vis­ers ad­vis­ing mem­bers re­tir­ing from large re­tire­ment funds fa­mil­iarise them­selves with th­ese in-fund prod­ucts and that they be­gin putting th­ese op­tions on the ta­ble.”

*Sec­tion 37C of the PFA places a duty on the fund trustees to iden­tify the de­pen­dants and nom­i­nees of the de­ceased mem­ber and ef­fect an eq­ui­table dis­tri­bu­tion of the ben­e­fit among those de­pen­dants and nom­i­nees.

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