According to Statistics SA’s 2019 population report, 9% of the population is 60 years or older, and the proportion of elderly persons aged 60 and older is increasing over time. As in the rest of the world, there is also an increase in people’s life expectancy, which has a severe impact on their retirement savings.
A longer lifespan has advantages, but it becomes harder to stretch your retirement pot over many years to ensure that your savings do not run out. It is therefore critical for employers offering retirement funds to their employees to assist in formulating an effective annuity strategy for the fund. An annuity strategy assists the members to convert their accumulated savings at retirement into a monthly pension that will keep pace with inflation and last them throughout their retirement years.
The primary function of an annuity is to invest a retirement savings lump sum in exchange for a stream of monthly payments, which will replace the retiree’s monthly income during their retirement years.
Not all annuities are created equal
There are various types of annuities on the market, but all the options fall into one of two basic categories:
1. Guaranteed life annuity
A guaranteed annuity will provide your fund members with an income that is guaranteed to last over their lifetime. However, the member’s heirs won’t be able to inherit whatever is left after their death, unless the member selected a guaranteed period when purchasing the annuity. The advantage is that there is no, or limited, inflation risk – that risk falls back on the financial institution that provides the annuity.
2. Living annuity
If you purchase a living annuity for your fund members, you need to make three important decisions: where to invest their money, how much to pay in fees, and how much income to draw from the annuity every month to cover their monthly living expenses. This is the more complicated option of the two, but the main benefit of the living annuity is that if the member manages their money well, they will have capital left to pass down to their heirs when they die.
On the other hand, if a living annuity is not managed wisely, the member could run out of money. In this case, the heirs may well need to provide financial support until the member’s passing. While the living annuity is the more flexible option of the two, the member takes on the inflation risk in this scenario.
The role of the employee benefit consultant
The employee benefit consultant’s role is to assist fund trustees and ultimately the members to package an annuity strategy that suits the business’ unique needs and budget – one that is focused on delivering specific, well-defined retirement outcomes for employees. The consultants are also responsible for aligning the pre-retirement investment strategy to match the default annuity strategy, to allow for a seamless transition.
'An annuity strategy assists members to convert their accumulated savings at retirement into a monthly pension that will keep pace with inflation and last them throughout their retirement years.'
New legislation now requires that every fund must have a default annuity strategy in place to assist members to use their accumulated savings wisely to provide a sustainable income during their retirement. Every member has different and unique circumstances that need to be taken into consideration. This is where expert advice is critical. An annuity strategy can make a significant difference to the retirement outcomes for members, and at Old Mutual Corporate Consultants, we believe that member outcome is the top priority for any employee benefits scheme.
The importance of making the right decisions when it comes to employee benefit solutions cannot be underestimated, and consultants have the knowledge and experience to guide you through the process. At Old Mutual Corporate Consultants, we are not just consultants – we are connected partners to our clients.
Call us to create a smart strategy for your business. Contact Rodney Msimango: Head of Business Development on +27 011 217 1420 or RMsimango@oldmutual.com.
General Manager, Old Mutual Corporate Consultants.