The FAIS Ombud recently issued a statement highlighting the need for retirement fund members to ensure they thoroughly understand the long-term implications of the annuity they choose at retirement.
A particular focus is the need for fund members to understand the limitations on accessing funds within life annuities.
The Ombud said a significant factor that affects financial planning at retirement is the failure to have accumulated sufficient retirement savings. This can be exacerbated by the client’s desire to maintain his or her standard of living in retirement, which results in drawing down a level of income that cannot be supported by the accumulated savings.
Therefore, financial services providers “need to have honest and frank discussions with their clients to manage expectations. Equally, it requires that clients appreciate that they may not have made sufficient provision for retirement, and that they consider the recommendations made and look to make whatever changes they can to their budgets to cater for the annuity income that can be provided by the capital invested,” the Ombud said.
The statement explains the features and risks of living annuities and life annuities and draws attention to the key planning considerations.
In the case of living annuities, the Ombud said the focus should be on preserving the capital, not only for beneficiaries, but also to ensure that the annuitant can continue to benefit from the annuity income for his or her entire life.
“The importance of selecting an optimal level of income that can be supported by the selected portfolios cannot be emphasised enough.”
With life annuities, the Ombud said the key considerations are whether the income will remain constant or increase annually to account for inflation, whether there is a need for a joint annuity, whether a guaranteed term is required, and whether to provide for dependants by way of a life cover policy (assuming the annuitant qualifies for cover). Regarding the latter consideration, the Ombud said the premium will be deducted from the income before it is paid. Clients should note that the life cover will significantly affect their income.
Two case studies
The statement refers to two complaints that arose because the members failed to appreciate the restrictions on accessing funds used to buy a life annuity.
In the first case, the complainant bought a single life annuity in 2017. In August 2021, the policy was transferred to another fund manager. Later, he wanted to claim some of the funds to pay R150 000 owing on his home loan. He wanted to change the frequency of the annuity payment from monthly to annually, which would facilitate releasing the funds essential for settling the outstanding balance. His request was denied.
The complainant argued the financial adviser overseeing the policy transfer had not thoroughly explained all available options and not recommended alternatives that aligned better with his financial needs.
But the FAIS Ombud made it clear that the payment frequency could not be changed.
In the second case, the complainant resigned from her fund at age 55 with a retirement benefit of about R300 000. She took a one-third lump sum and invested the balance in a compulsory life annuity. Post-resignation, she engaged in contract work, but her monthly income was insufficient to cover her living expenses. She wanted to access the capital used for the life annuity, hoping to regain her investment and improve her financial situation. But this is not permitted.
The FAIS Ombud said it could not help either complainant because they were informed about their annuity options and how they function.
“A common issue in these cases is a misunderstanding of the flexibility and limitations of their chosen annuity plans. Lack of comprehension regarding the flexibility of annuity plans can lead to financial strain, missed opportunities for adjustments, and potentially inadequate funds to sustain a comfortable retirement.”
The Ombud said it is not the FSP’s responsibility to make up for the client’s insufficient provision for retirement, by looking to maximise income at all costs. It is the duty of the FSP to ensure that whatever the client’s retirement savings, the client is provided with a recommendation that is appropriate to his or her needs and circumstances and will provide the client with an annuity income for life based on the level of savings at retirement.
