What 1 March 2019 means for your retirement savings
By: Andró Griessel – 9 June 2018
National Treasury has already warned in 2012 that it may need to regulate the cost of retirement products, if the financial sector and Government cannot come to an agreement on the excessive high cost of pension funds and retirement products (such as living annuities and preservation funds). Pension products are expensive and, in many cases, confusing. This is what led to the new regulations, which place an obligation on the trustees of pension and retirement funds to offer default options to members. These products should be inexpensive and easy to understand. The above has led to legislation taking effect on 1 March 2019. To this end all pension funds should provide a so-called "cradle-to-grave"-option to their members to enable them to manage their retirement savings in a sensible, inexpensive and transparent manner from the day they receive their first salary until the day they die.
Nico Burger of INfund Solutions, a subsidiary of the listed African Rainbow Capital and a major role player in providing solutions in this field, writes: "The first question that employees should ask themselves if they are considering retiring before 1 March 2019 from a fund that does not yet provide this option, is if they should not postpone (if possible) their retirement, until their fund does provide this option.
The advantage of reduced administration costs, management fees on the institutional fund and in certain aspects the saving on advice fees, can have a major impact on the retention of capital after retirement."
See the enclosed table which compares a traditional living annuity with an internal one. The asset management fees are based on the average management fees in the balanced category as provided by Morningstar.
There are funds such as the National Fund for Municipal Workers (NFMW) and others who were proactive in respect of the new legislation and who have already, for quite some time now, been providing their members with an internal living annuity option. I show the impact of the cost of these two options in the table.
Cost breakdown between a traditional and an internal living annuity
| Traditional living annuity Annual cost (VAT included) | NFMW – internal living annuity Annual cost (VAT included) | |
|---|---|---|
| Asset manager fees | 1.94% | 1.37% |
| Administration fees | 0.58% | 0.07%* |
| Total cost | 2.52% | 1.44% |
*Fixed monthly administration fee of R86.25 per month
The following facts and assumptions apply:
- The member retires at age 65 from the NFMW with a fund value of R1, 5 million.
- A net return rate of 9.5% after asset manager fees is obtained.
- An inflation rate of 6% applies.
- An initial income-withdrawal of 5% per year is made, which annually increases with inflation.
There is an annual saving of 42% (1.08 percentage point per year) in costs. The enclosed graph shows the impact of this on the retention of capital.
Projection of retirement capital over 7 years after retirement
If the retiree made use of the internal living annuity, he would still at the age of 92 have R 2 051 085 of his retirement capital left, about 2.6 times more than he would have had in the traditional, more expensive living annuity.
Burger further says: "There are a lot of funds that already provide internal retirement products, but to date there have been very few people who made use of these products.
The sector for living annuities is a multi-billion industry, growing annually by almost 21%. The industry is driven by high incentives and commissions. There is an obvious conflict of interest for the members' advisors to consider this cheaper alternative for their clients.
The answer is the following:
- Ask your employer/fund if provision is already being made for these options. If they are not yet making provision, find out when they plan to do so. The Act requires that it must be available by 1 March 2019.
- Legislation requires that retirement funds provide advice to members at least three months prior to retirement. Therefore, ask that your retirement fund provides you with someone who can outline the different options. This person may not be affiliated with any product supplier, for it to be a completely independent service.
- After this, if you still want to consult an advisor, make sure that he or she is contracted with the fund to promote these products and to compare these products with what is available in the market. Ask that the monetary value of any alternative is clearly pointed out.
Andró Griessel is a certified financial planner and Managing Director of ProVérte Wealth & Risk Management. Contact him at info@proverte.co.za. He writes regularly for Sake.
Implications for stakeholders
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Author: Andró Griessel
Source: Netwerk24
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