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SUB CATEGORIES General |  Savings & Investments |  Annuties | 

The debate continues

25 May 2006 Angelo Coppola

The debate around Retirement Annuities (RAs) continues, but this time from a different angle FAnews takes a look at what clients say about the RA issue and asked the insurers to respond and one of the responses is seen below. Should you wish to read further responses from Sanlam and Momentum, contact FAnews ([email protected]) to subscribe to the FAnews magazine.

We made several statements and comments about retirement annuities and posed a couple of questions, from an advisor and client perspective.

With all the new investment vehicles and the obvious positives in which they have been structured, why is it that once you have a retirement annuity you are sentenced to that mistake until retirement?

Why can you not look at changing your plan?

Why is it bad for my advisor to suggest such a change. Yes, there might be an initial loss but it is clear that this loss will be made up and that things could only improve.

I need to know exactly what my options are and what the reasoning is behind it.

It seems that the client is not really protected as far as my "best interests" are concerned because nobody is willing to place me on a better footing.

The regulations - are they protecting the insurance companies or the client?

As this is not a single question, but rather a series of statements, opinions and questions, all rolled into one, let us deal with it piece by piece:

With all the new investment vehicles and the obvious positives in which they have been structured

In spite of all the different investment vehicles on offer today, retirement annuities still offer some of the most beneficial structures available to the private investor.

According to Burke some of the unique and more attractive features of retirement annuities include the following:

* Contributions are tax deductible within certain limits, which means that government is actually subsidising part of the contributions. As an example, if we assume that a person is contributing R100, 00 per month for 20 years into a retirement annuity, and that their average marginal rate of tax over the term is 30%, then the cost-out-of-pocket for the client is only R70, 00 per month.

Over the term, this means that the client would actually have paid R16 800, 00 for R20 400, 00 worth of savings.

* The growth on specified portions of the retirement annuity fund is taxed at a favourable rate (currently at 9% per annum). By comparison, growth on savings policies is taxed at 30%.

* Currently, retirement annuities are not subject to capital gains tax.

* Retirement annuities are protected against claims of creditors.

Seen holistically, rarely do other investment vehicle structures offer a better, more secure deal to a client. This is why most investment companies, fund managers and life assurers include retirement annuities as an integral part of their product offering. Not including these obvious benefits would inhibit their ability to provide complete advice to clients.

why is it that once you have a Retirement Annuity you are sentenced to that mistake until retirement?

The advantages of retirement annuities come at a price. South Africa is recognised as having a poor culture of saving, including for retirement.

Saving for retirement requires significant discipline it is not only the amount that needs to be set aside in savings, but also the fact that there are many reasons to call on those savings prior to retirement.

The concessions on retirement annuities are given by government in an attempt to provide incentives to individuals to make their own provision for retirement.

In return, certain limitations regarding access to the capital, the minimum and maximum ages of retirement and the rules around pay-out at retirement are governed by regulation.

This has turned out to be positive, as hundreds of thousands South Africans actually end up better off than they would have been if they had not had a retirement annuity.

Why can you not look at changing your plan?

Once the concessions granted by government are utilised, human nature has dictated the need to protect retirement capital from its worst enemy - its owner! This is a well-proven fact.

However, great advances have been made to provide most of the flexibility needed, within the existing structure of retirement annuities.

For example, being able to switch between investment funds at no/low cost, splitting one premium between multiple funds, and lately, some companies are even allowing switches from older to more modern products.

The law even allows for switches between retirement annuity funds of different companies, if the fund rules allow it. As a result there are very few instances where clients are not able to address their concerns.

If all else fails and the client is still not satisfied, recourse mechanisms such as the Pension Funds Adjudicator and the Ombudsman have been created specifically for this purpose.

Why is it bad for my advisor to suggest such a change.

No adviser can give advice outside the parameters of the law.

In practice, what happens is that clients are sometimes advised to stop paying their contributions and to divert these contributions to another type of investment (also known as churning).

Although legal, this practice immediately results in a recovery of expenses by the relevant retirement annuity provider. This is done to protect other contributing investors from having to subsidize these expenses.

The practice of stopping premiums on one policy and taking out a new policy very rarely works out in favour of the client.

Yes there might be an initial loss but it is clear that this loss will be made up and that things could only improve.

It is by no means clear. The initial loss being referred to is presumably the benefit reduction that is applied when a policy is made paid-up, or premiums are reduced.

The chances of making up the loss and doing better in a new investment, generally requires a rate of return that is so high as to be unrealistic. In a low inflation environment, where growth and interest rates generally adjust downward to come in line with inflation, this possibility becomes even more remote.

I need to know exactly what my options are and what the reasoning is behind it.

Obtain advice from an accredited financial adviser. Ask a reputable financial services organization to assign one to you, if you dont have one. Get a second, or even third opinion from other accredited financial advisers. By law, these are the only people allowed to give advice on these issues.

It seems that the client is not really protected as far as my "best interests" are concerned because nobody is willing to place me on a better footing.

The interests of clients are more protected now than ever in the history of the industry. Numerous institutions and regulations now exist to ensure this.

Examples of such institutions and regulations are as follows; the Financial Services Board (FSB), the Pension Funds Adjudicator, the FAIS Ombudsman, the Ombudsman for Long Term Insurance, the Policyholder Protection Rules (PPR), the Financial Advisers and Intermediaries Services Act (FAIS), not to mention the relevant acts that govern specific services and products (Long Term Insurance, Pension Funds, Banking, Provision of credit, etc. etc.)

Also, as a result of improved communication, customer knowledge and the media, awareness of issues is very quickly raised in the public domain.

Contrary to popular belief, financial services providers want to keep clients happy, and this inherently means placing the interests of clients first. Products and services are constantly adapted, improved and replaced in order to remain relevant in an ever-changing environment. Much of this is driven by client input.

However, financial services providers also have to operate within the parameters of the law. When what clients want clashes with regulations, these institutions are bound by these laws.

The regulations - are they protecting the insurance companies or the client?

Generally, regulations exist to create a balanced framework, within which the interests and rights of all stakeholders are given equal measure.

However, over the last few years, much of the new regulation has been created in response to consumerism, specifically to provide consumer protection.

Editors thoughts:
* The responses to our comments and questions have been honestly answered.
* The debate on churning out of one product into another product will continue eternally, but ultimately clients need to be reminded to take a long term view.

Quick Polls

QUESTION

Do you believe this is the toughest period for financial advice in many years?

ANSWER

Yes, it’s hard to navigate the challenges and difficult to adapt. I’m struggling.
No, I have managed to navigate the challenges and have adapted. I’m good.
50/50. I just feel like whether we like it or not, we have to ready ourselves for change… be resilient and scale for the future. It’s not about survival of the fittest anymore but survival of the quickest. We just have to move on with life.
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