Alexander Forbes and Just have launched a blended annuity, which aims to deliver the advantages of both a living annuity and a guaranteed annuity. . Photo :Simphiwe Mbokazi/African News Agency (ANA)

This article was first published in the 3rd quarter 2018 edition of Personal Finance magazine.

By March 1 next year, all retirement funds must offer their members annuity (pension) options that conform to regulations that came into effect in September 2017. The aim of the regulations is to improve the likelihood that you, the fund member, will choose a pension that will last for the rest of your life.

Alexander Forbes and Just have joined forces to offer an annuity that conforms to the default regulations, and balances retirees’ need for income security with their desire to leave a legacy to their heirs. This unique solution is known as a blended annuity: a life (or guaranteed) annuity inside a living annuity. Essentially, you buy an Alexander Forbes Retirement Income Solution (Afris) living annuity and choose Just’s Lifetime Income annuity as one of the underlying investment portfolios.

The Lifetime Income portfolio provides an income to cover your “essential expenditure” for life; the balance of your retirement savings is allocated to the living annuity, where it can be invested more aggressively with the potential for long-term growth.

The Lifetime Income portfolio is a with-profit life annuity. This means it is guaranteed to pay a certain rand amount for the rest of your life, but any annual increases in your income will depend on the returns earned by the portion of the money invested in higher-risk, equity-type assets. If the returns are not above a certain threshold, you will not receive an increase.

The Afris living annuity is available to individuals who retire from a retirement fund that has adopted it as one of their annuity options. However, it is structured outside the fund. Alexander Forbes says there are two advantages to structuring the annuity outside the fund:

Members can consolidate savings from their other retirement funds, such as retirement annuities and preservation funds, into their living annuity; and

The fund’s trustees are relieved of the burden of administering the annuity and ensuring that it will provide a sustainable income.

The Afris blended annuity should not be confused with a hybrid annuity, where a life annuity is provided alongside a living annuity. Just says the drawbacks of hybrid annuities are that they allow for a once-off option at retirement to split your savings between the life and living annuities. If the life annuity has to be topped up later, you have to transfer all of your capital from the living annuity. In the case of a lifestage hybrid annuity, the top-ups must be made when you reach specific ages, or when other “trigger” points occur.

With the Afris living annuity, you can include the Lifetime Income portfolio at retirement or any time thereafter, and top-ups can be made at your discretion, although certain conditions apply.

Alexander Forbes says that to date nearly 100 retirement funds have adopted the Afris living annuity as one of their recommended options, while more have said they are interested in it.

Afris living annuity

You must have retirement savings of at least R600 000 to buy the Afris living annuity. This minimum amount is net of deductions, including the portion of your retirement fund benefit you take as a cash lump sum, tax, outstanding home loans and divorce orders.

If you choose to include the Lifetime Income portfolio as an investment option, it is mandatory for you to obtain advice from a financial adviser accredited with Alexander Forbes. You will have to negotiate the upfront and ongoing advice fees with your adviser. Your adviser will conduct a budgeting exercise to determine your essential expenditure needs, which will determine how much of your total savings should be allocated to the Lifetime Income portfolio, subject to a minimum investment amount of R50 000.

The R50 000 minimum also applies to any subsequent transfers of capital within the living annuity into the Lifetime Income portfolio. There is no maximum limit. You cannot switch money out of, or disinvest from, the Lifetime Income portfolio.

You can select only Alexander Forbes portfolios as the underlying investments for your living annuity.

As is the case with any living annuity, you select an income drawdown rate of between 2.5 percent and 17.5 percent of your capital, including the amount allocated to the Lifetime Income portfolio. 

The income from the Lifetime Income portfolio is treated similarly to any other income-producing asset within the overall living annuity structure. If the portfolio produces an income that exceeds the selected income, the balance is automatically reinvested in line with your selected asset allocation for the other portfolios.

The following costs apply to the living annuity (there is a separate fee structure for the Lifetime Income portfolio):

There is no upfront administration or investment fee.

The annual administration fee (including VAT) is based on the combined value of your assets in the living annuity as follows:

  • 0.388% on the first R1 million;
  • 0.216% on the next R1.5 million;
  • 0.173% on the next R5 million; and
  • 0.11% on any amount above R7.5 million.

The annual investment fee depends on the investment portfolio you choose. These fees vary from 0.35 percent a year for passively managed portfolios to about 1.25 percent for more aggressive portfolios. Some portfolios may also have performance fees, offshore fees and other costs.

On death, any capital remaining in your living annuity will be paid to your nominated beneficiaries, who can:

  • Continue to receive an income from the living annuity;
  • Use all or part of the money to buy a pension from a life assurer; or
  • Take all or part of the money as a cash lump sum.
  • If you do not nominate any beneficiaries, the remaining capital will be paid into your estate.

Lifetime Income portfolio

This is a with-profit annuity, which means your guaranteed income will rise in line with the increases declared annually. These are based on the investment returns, subject to “experience adjustments”. Once declared, an increase forms part of your new guaranteed amount, and your future income will never fall below this amount.

To generate an income, the Lifetime Income portfolio invests in fixed-interest investments and the Alexander Forbes Investments Performer Managed Fund.

Just says it uses the fixed-interest investments, “supplemented by its own capital if necessary”, to provide the insurance that the income from the Lifetime Income portfolio will never decrease. These investments are mainly structured term deposits with the country’s major banks, and government and parastatal bonds.

Your annual income increases are linked to the performance of the Alexander Forbes Investments Performer Managed Fund, which was launched in September 1997. Any increase will be declared on April 1 each year (not on the anniversary of your policy).

The Lifetime Income portfolio included in the Afris living annuity is a modification of Just’s life annuity product; as such, it does not work in exactly the same way as the stand-alone product. For one, the stand-alone product has a range of options when it comes to choosing your initial income, or post-retirement interest rate, and your income growth rate.

These options do not apply when you include the Lifetime Income portfolio in your Afris living annuity. Instead, you will receive a quotation for the level of your initial income, which will depend on your age, gender, socio-economic status, lifestyle and health.

Your starting income will also be affected by whether you opt for a joint-and-survivorship annuity (both you and your spouse receive a pension, and your spouse receives a percentage of the joint pension after your death) and whether you buy a guarantee, which means the annuity will be paid for a minimum period irrespective of whether you and/or your spouse are still alive.

Currently, the annual income increases are based on a single formula, which is:

  • The average investment return of the Performer Managed Fund over six years up to the date on which the annual increase is calculated, less asset management fees;
  • Less four percent, to allow for a guaranteed return of 2.9 percent taken into account in calculating the initial income and the product management fees of 1.1 percent; and
  • An “experience adjustment”, which be positive or negative.

In other words, your increases will kick in only if the average (or “smoothed”) investment return over six years is four percent. If the net average investment return over this period is less than four percent, your pension will not increase.

And your increases will be affected if Just applies an “experience adjustment”. Just says this means the increases may be lower or higher than projected if it has to change its “best estimate” assumptions about life expectancy, market volatility and trading costs, or if a bank fails. Just says these assumptions are reviewed annually by two independent actuaries, and any adjustment to your income will be spread equally over six years. However, your income can never decrease.

On death, you can choose for all or a portion of the income to continue to be paid to your spouse, or for the income to be paid for a minimum guaranteed period. If you choose neither option, you (or your spouse) will lose the money invested in the Lifetime Income portfolio.

This is why you may want to buy a guarantee, which will ensure that any money in the Lifetime Income will be paid out to your beneficiaries, either as a lump sum or an income, for the remainder of the guarantee period. However, the guarantee comes at a cost to your initial income.

The longer your life expectancy, the cheaper the guarantee. A guarantee will have a very small impact on a joint-and-survivorship annuity, because it is likely that at least one spouse will outlive the guarantee period.

The following fees apply to the Lifetime Income portfolio:

An initial fee of one percent (no VAT payable) is included in your initial income. It covers the costs of setting up the insurance, administration records and facilitating the transfer of your investment amount into the annuity.

Monthly fees based on the market value of your investment:

A product management fee of 1.1 percent (no VAT payable) a year. This fee covers the cost of the insurance provided by Just, administration, operational expenses, and reporting to the regulators.

An annual asset management fee, charged by Alexander Forbes Investments, of 0.9 percent (including VAT), but excluding any offshore, performance and other fees and excluding transaction costs.

The fee structure remains the same whether you include the Lifetime Income portfolio when you initially buy the living annuity or add it later in retirement.

Just says the estimated total expense ratio and transaction cost is 1.86 percent and 0.08 percent respectively, or a total investment charge of 1.94 percent (taking into account the portion of the assets invested in the Alexander Forbes Investments products).

PERSONAL FINANCE