Retirement benefits for lower income groups need far more attention, says Simeka

: In its latest retirement reform discussion paper, the National Treasury has raised concerns about what it terms ‘inadequate rating’ in conventional annuities. “Inadequate rating could, for example, make annuities expensive for the poor and sick, who may

Against this background it is vital that more attention is placed on the retirement planning of those South Africans who earn less than R150000 per year – roughly 80 percent of members of retirement funds. To do this, Freddy Mwabi, actuarial specialist at Simeka Consultants & Actuaries (Simeka), believes employers and trustees need to review their annuitisation strategies to ensure they are in the best interest of their workers. “Until new legislation is passed, we need to consider what is in the best interests of those who retire with lump sums of between R300 000 and R1 million.”

Lower income earners have been identified by National Treasury as vulnerable for various reasons. Not least of these is the means test for the older person’s grant. “You need to earn less than R47 400 per year - or a combined income of R94 800 if you’re married - to qualify for the grant. But the old age grant of R1 200 a month decreases gradually for people earning an annual income of between R14 400 and R47400 assuming they own no other asset,” said Mwabi.

The National Treasury has said it is concerned that the means test could encourage low income workers to choose living annuities and withdraw their assets quickly in order to qualify for the grant at a later date. “We need to ask: How do we ensure that lower income earners, who have lower life expectancy, don’t subsidise higher income earners? Fairly priced annuities could provide the answer,” said Mwabi. National Treasury have suggested that fairly priced conventional annuities, which would take into account rating factors other than age and sex, are a sensible option for low-income households as they provide a secure income, no matter how long the individual lives.

“Once purchased, the annuity runs automatically, and requires no decisions, financial advice, knowledge or management. They are also a good option as people with pension accumulations under R300 000 will retain access to the old-age grant.” Mwabi believes trustees should focus on flexible contributions and default annuities. He also proposed that financial literacy workshops should be held for members of pension funds.

“This will be very important for future and we’d be keen to participate in developing these workshops.”

Simeka investment consultant, Willem le Roux, said that members need to be guided in the right direction, according to what stage they are in their lives, so that they have sufficient returns in the long run. “The secret to investing is to address the right risk at the right time.”

He suggested that lower costs and increased competition would serve the interests of members. Furthermore, the alignment of commission payable on living annuities and guaranteed annuities would reduce any potential conflict of interest on the part of personal financial advisers.