The RA debate continues

Over the years, RA’s have received much criticism levelled against it; such as life assurance RA products’ costs and charges being amongst the highest in the world. As a result, this could negatively affect the RA’s maturity values and reduce them by as much as 50% under various conditions.

Various media have also undertaken their own investigations regarding the costs and high causal event penalties of RA’s; with none of the aforementioned exposure in the media boding well for the reputation of RA’s as a retirement option.

However, when put into context and analysed holistically within the correct factual framework, it becomes obvious that the retirement annuity should be included in your financial planning over the long term.

Under the Financial Advisory and Intermediary Services Act and General Code of Conduct, financial advisers have to go through a six-step financial planning process which includes a financial needs analysis conducted on the client’s portfolio. They also have to do a financial plan, which is established on a financial needs basis, with shortfalls or opportunities.

This allows the financial adviser to develop a complementary match of products to successfully ensure the client’s financial plan has at best, the opportunity to work through his or her life stages and life changing events. This must all be done with due diligence, care and skill and in the best interests of the client at all times.

It is therefore critical for financial advisers to not only have the knowledge in respect of products they recommend, but also to fully appreciate and keep up-to-date with current or future legislation; which may impact on such products. An example of this would be the implication of tax regulation changes and the impact thereof on RA’s.

There are certain pre- and post-retirement advantages of RA’s that make the product viable and necessary to the financial plan of clients. Below are just some of these.

- If you fall in the upper 40% marginal tax bracket, then the Receiver of Revenue is sponsoring almost half of your retirement contribution.

- The proposed changes to the 15% non-retirement funding income (NRFI) allowance under the retirement reform proposals will increase the 15% to 27.5%, and make the RA an even more viable retirement option from 2015.

- Taxes on the internal investment build-up of funds are also exempt from capital gains tax.

- The recent increase in dividends tax (DWT) made retirement annuities an even more attractive way to save for the long term because returns from RA’s are exempt explicitly from DWT.

- RA capital build-ups are protected under the Pension Fund Act against creditors prior to retirement age.

- Your lump sum at retirement is tax-free for the first R315 000.

- An RA can be used to build-up a fund for post-retirement medical expenses in a tax-efficient way.

- Having RA products in your client’s portfolio creates to a certain extent a forced saving culture to commit to long term savings.

If a client contributes at a sufficient level for long enough, and with the continual advice from a financial adviser, there should be no reason why a client’s retirement annuity would not work for them over the long term even with reduced yields due to cost compared with other products outside of compulsory retirement products.

In conclusion, an RA in any form (life assurance RA’s or Lisp RA’s) should be part of every client’s retirement planning. They should however be purchased within the framework of affordability; and within the reasonable expectations of the client and subject to continuous management at all times.

That is the responsibility of financial advisers.