Liberty has launched a retirement annuity (RA) fund and two preservation funds that, long before you retire, enable you to use some of your savings to secure an income in retirement.
The RA fund and preservation funds in Liberty’s Agile Retirement range are “new-generation” funds – you choose the underlying investments from a variety of unit trust funds and a number of life assurance portfolios on an investment platform.
The Agile range’s unique feature is that, if you allocate some, or all, of your savings to one of the portfolios, called the Exact Income Fund, Liberty will guarantee a particular income, or pension, based on the amount in the income fund.
While you are saving for retirement, your main focus should be on the income your retirement savings will produce. But with most retirement funds and RAs, your savings accumulate as a lump sum that is paid to you when you retire. You therefore face the risk that the lump sum will not generate sufficient income in retirement. Even if you continually assess the income your lump sum is likely to produce, the cost of securing an income (through either a guaranteed or an investment-linked living annuity) changes over time.
Liberty’s Agile Retirement range seeks to address these risks by enabling you to start securing your retirement income by allocating some of your savings to the Exact Income Fund from 20 years before you retire. The allocation to this fund will be shown on your policy statements as an income at your chosen retirement age.
The investment in the Exact Income Fund is, in effect, a contract with the life assurer that it will provide an annuity that pays a particular income at your chosen retirement date.
An annuity bought many years in advance of retirement that pays a pension on retirement is known as a deferred annuity.
The Agile range’s Exact Income Fund operates like a deferred annuity, although technically it is not a deferred annuity, because, until the date on which you retire, you can choose to take a different annuity.
Mark Lapedus, the head of product development at Liberty Investments, says the Agile range gives you the flexibility, in the run-up to retirement, to choose how to allocate your savings between investments that will secure an income and investments in unit trusts and other funds that aim to deliver good capital growth.
Liberty suggests that, as you approach retirement, you increase the portion allocated to securing an income through the Exact Income Fund. Liberty allows you to allocate 100 percent of your savings to the income fund from the age of 55.
Lapedus says the further you are from retirement, the less you should lock yourself into a guaranteed income, because you should be taking more investment risk to achieve maximum growth and because you do not know what your financial needs in retirement will be.
The income, or pension, the Exact Income Fund guarantees will not increase with inflation – it will be a level annuity, but it is guaranteed for life, except in the highly unlikely case of average life expectancies increasing by 75 percent.
A level annuity comes with the risk that your guaranteed income will be eroded by inflation each year, but Lapedus says that most people buy these annuities.
He says you should use the Exact Income Fund with the other portfolios that will generate real (after-inflation) returns. You can use these returns to buy more income each year.
At retirement, you can, based on your needs, buy any Liberty guaranteed annuity – for example, an inflation-linked one – and the starting income will be adjusted proportionately.
You can change your mind
You can switch out of any allocation you make to the Exact Income Fund, and, for this reason, in addition to being quoted the guaranteed pension, you will be quoted a cash value.
In addition, Liberty will quote you what the guaranteed income you have secured for your retirement represents in terms of a return on your investment in the Exact Income Fund. It calls this an “equivalent portfolio return”, and it is the level of return you would need from another investment to match the income you will receive from the Exact Income Fund, assuming no change in annuity rates.
You can also change your retirement date at any stage, in which case your income will be adjusted accordingly.
What’s on the investment platform
Apart from the Exact Income Fund, members of a Liberty Agile RA or preservation fund can choose their underlying investments from a range of 100 unit trust funds from 15 asset managers and 10 index-tracking portfolios managed by Liberty, with or without guarantees on the capital.
There is a platform fee of 0.3 percent a year, as well as an asset management fee for each unit trust and/or index-tracking portfolio that depends on the fund or portfolio.
Some things to consider
According to Liberty, there is no platform fee or explicit fund fee for your allocation to the Exact Income Fund, because the costs are built into the income you are promised.
You cannot compare this promised income level to any other product, because currently you cannot buy deferred annuities in South Africa. You can consider only the equivalent portfolio return and/or compare the pension you will receive at retirement with the annuity rate you could secure with your cash value at retirement.
You should also remember that, as is the case with any life-stage investment, there is an opportunity cost for investing in this portfolio.
Wouter Fourie, an independent financial planner at Ascor and the winner of this year’s Financial Planner of the Year Award, says lower-risk assets provide lower returns. It is important that you limit your exposure to the Exact Income Fund when you are young and increase it gradually as you approach the date on which you will retire, he says.
Securing the income upfront in this way means that, as your retirement date approaches, your pension is protected from the risk of the markets turning against you and/or it costing more to invest for an income in the form of a guaranteed annuity or a drawdown from a living annuity.
If your projected income is not guaranteed, unlike the case with the Agile range, the cost of buying an annuity (the rate of income purchased) in retirement changes as interest and bond rates change.
The Agile range
The minimum investment amount in the Agile RA is a lump sum of R15 000 and/or a recurring investment of R1 000 a month.
The minimum lump-sum investment for the preservation funds (the Agile Provident Preservation Fund and the Agile Pension Preservation Fund) is R150 000. You can stop or resume your recurring investments in the RA at any time without incurring a penalty.
However, as with any RA, you can access your money in the RA before the age of 55 only if you are in ill-health, if you emigrate, or if you split your retirement savings with your former spouse in terms of a divorce order.