In May of 2012, the National Treasury released a document raising issues surrounding how best to ensure that South Africans have access to appropriate savings vehicles and that they make adequate provisions for retirement.
In this document, Treasury notes that the current system “guards policy holders when they contribute, but the quality of protection declines when members retire”. Of particular concern to Treasury are living annuities.
Living annuities are highly popular retirement products used by retirees to meet their income needs. The major advantages of these products are choice, flexibility and retention of ownership. Their shortcoming, however, is that they place the demanding responsibility of guarding against longevity risk – the risk of outliving one’s saving – in the hands of the retiree.
The Treasury’s concerns surrounding these products stem from the fact that:
1. Charges are too high;
2. They require complex choices; and,
3. Many investors draw an unsustainably high level of income from their investments, resulting in the depletion of capital.
The implications of these concerns for product providers are that living annuities need to be:
1. More cost effective;
2. Easier to understand; and,
3. Must assist the investor to guard against longevity risk.
The Perpetual Annuity, Marriott’s Living Annuity product, has an all-in fee up to a maximum of 1.75% (excl Vat) and has been designed to provide the key information that any person drawing an income from their retirement savings needs to know. This information includes:
· The amount of income being produced by the underlying investments; and,
· The rate at which that income is likely to grow
This information will assist post-retired investors avoid capital erosion which occurs when an investor draws more income than that produced by the investments. By eroding capital, an investor reduces future income, so it is vital in the early stages of retirement that capital is preserved as far as possible to prevent investors from outliving their savings. Capital preservation can be achieved by selecting investments which produce the desired income yield. Growth in income can be achieved by including equities in the investment mix. Crucially, the choice of equities should include only those which generate a reliable, growing income stream.
By adopting the approach of matching the annuity drawn to income earned, investors will ensure their capital base remains intact, and therefore removes the risk of the annuity not lasting.