Year-end tax opportunities put spotlight on retirement annuities

New generation pensions have changed the retirement annuity (RA) landscape and the next few weeks, before the end of the 2007/08 tax year, will be critical for self-employed professionals facing decisions on their retirement savings.

According to Nick Battersby, CEO of PPS Investments, the investment arm of the mutual society, there is a window of opportunity before the end of February when ad hoc retirement annuity payments can be invested in more tax-efficient new generation products, without incurring heavy penalties.

Professional Provident Society (PPS) is the last remaining mutual life office in the country and comprises a membership of 160 000 professionals, including doctors, lawyers and engineers, among others, who benefit from sickness benefits and life cover as well as sharing in the profits of the company.In 2006 the members’ share of the value of PPS grew by R 2.2 billion through the company's surplus rebate account (SRA) which is paid out proportionally to investors when their investments mature.

As a direct consequence of the inflexibility of traditional retirement annuities (RAs), members who adjusted their monthly contributions in the past were heavily penalised by product providers.

“We are finding that some professionals are choosing to commit to making reduced payments rather than get caught short and penalised later on,” said Battersby. “The net result is that, without regular top-ups, they ultimately won't have saved enough for retirement.”

In traditional RAs, the payment of commissions due on the life of a policy was accelerated with the effect that the financial adviser would be paid the entire value of their commission for a policy’s lifetime, irrespective of whether the future amounts were actually paid or not, with the fund member bearing the cost.

As a consequence, any deviation from the agreed monthly payment could result in penalties to the policy holder. This made it difficult for irregular income-earners, such as self-employed professionals, to commit to regular payments and led to some preferring to make annual ad hoc payments to their RAs.

There also exists a perception that penalties arise if these ad hoc payments are not placed with the existing RA. As Battersby points, this is just not true. “Ad hoc payments are not contractual and you are free to invest wherever you prefer without incurring any penalties."

Until May 2007 the only investment product offered by PPS was the PPS Retirement Annuity Fund, a traditional Sanlam product. Since the launch of PPS Investments as a joint venture with Coronation Fund Managers last year, a range of new generation retirement annuities and investments have become available to PPS members, including the PPS Personal Pension Fund.

Some 36 unit trusts are on offer within the flexible PPS Personal Pension, from 7 unit trust companies including Coronation, Allan Gray and Investec. It allows member investors to change their portfolio or transfer their investments across different funds and fund managers without incurring costs.