Life cover is a core risk protection benefit.  This benefit provides cover for your family or dependents where your whole contribution goes towards covering the risk of your death. There is no investment portion which means that your full death benefit will be paid out directly to your beneficiaries when you die.

This benefit should typically include cover for debt where applicable and/or other monthly budget items like household and healthcare expenses as well as provide for death-related expenses, such as potential estate duty and funeral costs.

The purpose of funeral benefits is to help pay the funeral costs when a life assured passes away.  Funeral benefits can be extended to include a pay-out in the event of the death of the spouse, life partner or eligible child of the life assured.

Funeral cover works by paying a monthly amount towards a funeral plan so that in the event of death, a specified amount will be paid out to your family. This means that during this difficult time, the costs of a funeral will be covered so that your family won't have to struggle with the expenses

The ability to generate an income could be considered as one of your most valuable assets. Protecting the ability to earn your entire future income is therefore of vital importance. If you were to become unable to work as a result of a temporary or permanent disability or as a result of a serious illness, it could have a serious impact on your income. You and/or your family could find yourselves facing serious financial difficulty or having to access investments that have been earmarked for other objectives to maintain and meet your normal monthly living expenses. There are further risks of being faced with medical bills not covered by your medical aid scheme.

The lifestyle you worked so hard to build could quickly be completely destroyed.

The list below indicates the main differences between Income Protection versus the Lump Sum Disability Benefit.

Income Protection	Lump Sum Disability
Covers temporary and permanent disability	Covers permanent disability
Premiums paid are not tax deductible with effect from 01/03/2015	Premiums are not tax deductible
Income benefits are tax-free with effect from 01/03/2015	Lump sum benefit paid out tax-free
Waiting period is selected by life assured and could be as low as 7 days	Waiting period is stipulated in the policy contract but is typically 6 months (could differ between product providers)

 

The perception is generally that it is more expensive to provide an income protection benefit than a lump sum disability benefit. However, if one makes the comparison you can see from the above table that the assumptions used for the comparison need to be prudent and that it will be difficult to make an “apples for apples” comparison.

Again, the objective for providing the disability cover will generally determine which benefit is more suitable.

A lump sum benefit could be considered for the settling of a debt, e.g. bond, in the event of the policy holder becoming totally and permanently disabled. If the disability is of a temporary nature the income protection policy will provide a monthly benefit which could then enable the policy holder to maintain the bond repayments. A combination of the two benefits could also be considered as a more comprehensive cover.

A waiver of premium rider benefit pays the respective premiums due if the insured person becomes disabled.  A waiver of premium rider is an optional benefit on many contractual insurance policies and may also be available on permanent forms of insurance coverage.

The waiver of premium rider will provide a benefit only if the insured person becomes totally disabled.  If a total disability occurs, the remaining premium charges will no longer be required to be paid but the policy will remain in force for the length of term that the policy was written for.

The requirements of the rider usually state that the insured person be “totally and completely disabled”.  The most common definition of a total disability is one where the disabled person is no longer able to earn any income from a position which they are reasonably suited for and will not be able to at any foreseeable time in the future.

Severe illnesses and injuries will impact you and your family both emotionally and financially. You will normally need to undergo extensive treatment which you may or may not be able to afford.

The good news though is that because of advances in medical technology, your chance of surviving such an event is high. However, the costs involved can be crippling. You have to ask yourself whether, after escaping a near death experience, would you be able to survive the financial impact and still maintain the standard of living you are used to?

The last thing you need when you are struggling to recover from a severe illness is the added financial worry of paying for your recovery. In fact, research has shown that a positive state of mind goes a long way towards making a full recovery.

A dread disease benefit provides a lump sum benefit payment when you contract or suffer a dread disease event. It is also referred to as Recuperator, Critical Illness Benefit or Trauma Benefit.

This benefit is specifically designed to help make your recovery process easier without you having to worry about the financial burden that a severe illness or injury can place on you and your family.

The definition of a dread disease has changed over the past few years. To help one compare various severe illness protection products in the market, the Association for Savings and Investment SA (ASISA) created a Standardised Critical Illness Definitions Project (SCIDEP) which was set up to standardarise industry definitions.

These were implemented in September 2009 to ensure that consistent and objective decisions are made by the various product providers.

The standard definitions apply to the following four “core” diseases that makes up between 70% and 90% of all dread disease claims:

• Heart attack
• Cancer
• Stroke
• Coronary artery bypass graft (CABG)

Broadly speaking, conditions listed as dread diseases can typically be differentiated between essential (core) and inclusive (comprehensive) conditions. Essential conditions cover dread diseases such as cancer, heart attack, kidney failure, major organ transplant, paralysis, stroke and blindness, whereas inclusive conditions (typically covered at an additional premium) cover loss of limbs/hearing/speech, coma, burns, multiple sclerosis, motor neuron disease, Parkinson's and Alzheimers, a benign brain tumour, aplastic anaemia, severe ulcerative colitis, severe Crohns disease, primary pulmonary hypertension, acquisition of HIV from blood transfusion and occupational acquired HIV.

Below is a summary of recent claims statistics of one of the product providers which highlights the need for this cover.

Retrenchment is a form of dismissal due to no fault of the employee.  It is a process whereby the employer reviews its business needs in order to increase profits or limit losses which leads to reducing its employees.

Retrenchment Benefits offer income protection insurance that pays your salary for up to six months if you are retrenched from your job.

Medical scheme membership protects members financially if they suddenly have to pay large, unexpected medical costs. Medical schemes pay for many other healthcare needs such as nursing, surgery, dental work, medicine, physiotherapy and eye-care.
People who don’t have health insurance tend to wait until their condition is at its worst and use the emergency room to get care. This results in large bills from doctors and facilities that often go unpaid. To recoup those funds, hospitals are often forced to charge more for services to everyone across the board.

Contrary to public perception that all medical scheme options are expensive, most schemes offer affordable, low-cost and entry-level options to suit all members’ needs.

Here are some of the benefits of having a medical scheme:

• Through medical scheme cover members can access some of the best private hospitals in the world.
• Medical schemes pay for many other healthcare needs such as nursing, surgery, dental work, medicine, physiotherapy and eye-care.
• Medical scheme membership protects members financially if they suddenly have to pay large, unexpected medical costs.

Retirement Annuities (RA’s) have proven to be a beneficial savings instrument for many people because it encourages disciplined savings with accompanying tax incentives.

RA’s provide you with a retirement capital to enable you to purchase a life-long pension income after retirement. It is very important for your long-term financial security to save regularly for your retirement and a RA fund offers you the ideal method to do so tax-efficiently.

Tax Efficiencies
An RA fund provides a tax-efficient method of saving for retirement for people who do not belong to an employer’s pension fund or those who want to top up their retirement provision. The government encourages you to save for your own retirement by allowing you to deduct your RA contributions from your taxable income.

The diagram below sets out a summary of the tax benefits of a Retirement Annuity:

 

Tax Incentives – Deductibility on contributions
Retirement annuity contributions reduce the investor’s taxable income up to certain limits. Part of the contributions comes from tax savings which means that the South African Revenue Service (SARS) is paying a part of the client’s retirement savings.

For example:
This means that for each (say) R10 000 invested in a retirement annuity, R3 000 (for someone taxed at a marginal rate of 30%) is effectively paid back by SARS.

The tax deductibility of retirement funding contributions was amended in March 2015. The amendment brought about a consolidation in respect of the tax deductibility of contributions across all retirement funding vehicles namely, Pension Funds, Provident Funds and Retirement Annuity Funds.

The tax table that sets out the current tax-deductibility on retirement fund contributions came into effect on 01 March 2016.

	Deductions for all retirement funds
Member contribution to Pension, Provident & Retirement Annuity Funds	Up to 27.5% of the greater of “remuneration” or “taxable income”. Annual monetary limit of R350 000.
Employer contributions to Pension, Provident & Retirement Annuity Funds	Unlimited deduction. Employer contributions taxed as a fringe benefit in employee’s hands and deemed to be employee contributions.

 

Based on the above parameters, one can calculate the amount of the “tax-efficient” contributions that can be made to a RA policy.  

Tax incentives – on the underlying investment portfolio

Another big tax advantage is that the growth on the investment is tax-free!  Tax is not payable on rental income and interest and no tax is payable on either capital gains or dividends received in the investment fund of a retirement annuity contract or retirement fund.

Tax incentives – at Retirement

Also of value is the favourable tax-treatment of the lump sum proceeds at retirement.  On retirement, the first R500 000 of all retirement funds (cumulatively) is tax-free and the rest of the lump sum taxed at favourable tax scales.

Lump sums accruing between 01 March 2014 and 28 February 2018 are subject to the following:

Retirement Tax Table:

Taxable portion of lump sum	Rate of tax
R           0  - R500 000	Nil
R500 001  - R700 000	18% of the amount exceeding R500 000
R700 001  - R1 050 000	R36 000 plus 27% of the amount exceeding R700 000
Exceeding - R1 050 001	R130 500 plus 36% of the amount exceeding R1 050 000

 

An assessed loss cannot be set-off against the taxable lump sum.

For purposes of calculating the tax-free amount, benefits arising from all pension, provident or retirement annuity funds of which you may be or have been a member are taken into account.

It is important to note that any previous withdrawal benefit/s taken from pension and/or provident funds as a cash lump sum will reduce the tax-free benefit payable at retirement.

Retirement Annuity Characteristics

RA contracts are long-term financial commitments.  An RA will provide the best benefits at retirement provided you keep up your contractual contributions.

To ensure that you will receive the best value for money and make the best provision for your own retirement, you should continue with the contributions until the retirement date and should always attempt not to let the RA policy become paid-up if at all possible.

The paid-up values of traditional RA policies are not very high, particularly in the initial years of the policy term.  The acquisition expenses of insurance products are normally recouped over the full term of the policy but if a policy is made paid-up these expenses are largely recouped from the accumulated policy value at that stage. It is important to realize that the long-term value of an RA policy should not be judged by the relatively low short-term paid-up values. 

As a result of this it has brought about much negative publicity about traditional RA policies and in some instances investors may now doubt the continued value of RA policies.  Some may even stop their contributions and let their policies become paid-up. 

It is not advisable to make an RA policy paid-up if you can afford to pay the contributions.  It is particularly inadvisable to make one RA policy paid-up and replace it with another RA policy.

It is never wise to speculate with your long-term retirement provision based on short-term market trends.  You may decide to invest elsewhere in addition to a secure and tax-efficient RA policy but never do that instead of an existing RA policy.

We recommend that a unit trust RA be considered as opposed to a contractual RA, also known as a portfolio of a Collective Investment Scheme. This type of RA is an arrangement that enables investors to pool their money and have it professionally managed and invested in a range of underlying assets. The underlying assets of a portfolio vary depending on the portfolio’s investment objective. Portfolios are commonly referred to as unit trusts or funds.

This RA arrangement is more flexible and one is able to stop the contributions should there be circumstances beyond one’s control that necessitate this action.  Ad-hoc payments, subject to certain minimum criteria, may also be made into your unit trust RA.

A unit trust RA is also very cost-effective in that the fees are deducted monthly as and when the contributions are paid.  This ensures that cessation of contributions or making the RA paid-up will not result in any termination costs reducing your fund value.

There are a wide choice of investment funds and products offered by product providers.  Should the existing underlying investment portfolio become unsuitable you can easily switch the investment fund into a more suitable portfolio of your choice or you may even have more than one investment fund per contract to ensure that your investments will match your changing needs.

An annual tax certificate is issued by the product provider setting out the information pertaining to the total annual premiums paid towards your RA for the respective tax year.  This tax certificate must be submitted with your annual tax return so that you can ensure that the deductibility is applied to your annual remuneration and that you benefit from the relevant tax relief provided by the contributions paid for the respective tax year.

 

How does the Fund work?

The diagram below illustrates how you, the administrator, the fund and the trustees interact.

 

What is the purpose of the Fund?

To provide: 

• you with a benefit at retirement, or
• your dependents and/or beneficiaries with a benefit on your death.

What is the role of the Trustees?

Although there is a sponsor of the Fund, it is a separate legal entity governed by the Board of Trustees. Some of the trustees must be independent (which means that they must not be employed by the sponsor). The trustees must protect the interests of members and act with impartiality, due care, diligence and good faith. The law specifically requires the trustees to apply the rules of the fund, appoint a principal officer, communicate with members and ensure proper administration. The trustees have put governance procedures in place to fulfil these responsibilities to members.

What does the Fund do with your contributions?

The Fund invests your contributions in the unit trusts or investment portfolios which you have selected. The investments are owned by the Fund and you have no right to specific investments held by the Fund. The investments are held via a nominee company.

How does the Investment Account work?

You must choose any one or a combination of the unit trusts/investment portfolios made available by the Fund as the underlying investments of your investment account. The value of the investment account is directly linked to the market value of the underlying investments and is not guaranteed (i.e. may move up and down). The value of the investment account is increased by your contributions (including transfers from other retirement funds) and positive investment returns.

The Fund re-invests all dividends and interest earned in the unit trust. The value of the investment account is reduced by negative investment returns and any relevant fees and charges.

Past performance of the underlying investments is not necessarily a guide to the future. You carry the risk of the value of the investment account being reduced.

When does your membership of the Fund start?

Your membership starts once:

• the administrator has received your application and supporting documents, and
• the administrator on behalf of the Fund has accepted your application, and
• your contribution is received in the Fund’s bank account.

When does your membership of the Fund end?

Your membership of the Fund will end when the total value, less fees and charges, of all your investment accounts are paid out, for example on withdrawal, retirement, death or transfer to another retirement annuity fund.

A Brief Summary

A retirement preservation fund is specifically aimed at investors who want to preserve existing retirement monies, on a tax-free basis, in order to create wealth for a secure retirement.  It is a single contribution retirement investment vehicle that enables the investor to preserve their retirement monies resulting from prior membership of a pension or provident fund.  Any tax liability resulting from the withdrawal of the investor’s benefit is also avoided.

The retirement preservation fund consist of separately registered umbrella pension and provident funds to which members of existing pension or provident funds can transfer their accumulated benefits on termination of service on a tax-neutral basis that recognizes your years of service and gives you full tax advantages at retirement.

This will ensure that irreplaceable retirement fund savings are preserved for their original purpose: a secure and adequate retirement benefit as well as ensuring the continued growth of such benefits.  These preservation funds, pension and provident, are available to employees who withdraw from pension and/or provident funds as a result of resignation, retrenchment or the winding-up of such fund or funds.

It is not available at retirement or to members of pension funds who are converting to provident funds as a vehicle for the preservation of otherwise taxable transferred members’ contributions (please note that a single premium retirement annuity can be used for this purpose).

 

How does the Fund work?

The diagram below illustrates how you, the administrator, the fund and the trustees interact.

 

What is the purpose of the Fund?
To provide:
• you with a benefit at retirement, or
• your dependants and/or beneficiaries with a benefit on your death.

Preserved Portion and Accessible Portion
In some cases, the trustees of the transferring fund will only permit transfer of the employer’s contributions provided these contributions only become payable at retirement. In these cases two contracts will be issued, one containing the member’s contributions and the other the employer’s contributions. The latter will not be encashable should the member wish to take advantage of the once-off withdrawal facility.

Flexibility/Withdrawal
There is a once-only option to withdraw all or part of the preserved benefits prior to retirement, subject to the lifetime tax exemption of R25 000. Amounts in excess of this tax exemption are taxable at average tax rates as stipulated by the South African Revenue Service. The balance of any remaining benefit becomes locked in until the normal retirement date of the transferring fund.

Transferring Fund
The transferring fund is the pension or provident fund from which the accumulated benefits are transferred.

A withdrawing member may transfer benefits from a provident fund to either a pension preservation fund or a provident preservation fund. There is little point in transferring to an investment vehicle where the benefit is not wholly a cash lump sum in such a case.

Transfers from a pension fund may however only be made to a pension preservation fund. The normal retirement age of the transferring fund will be used for the retirement preservation contract. This means that the retirement reservation plan will mature at this normal retirement age.

Benefits: -
Retirement Benefits:
For a Pension Preservation Fund, one-third of the investment value may be taken as a cash lump sum at retirement and the remaining two-thirds must be utilized to purchase a pension in terms of current legislation.

For a Provident Preservation Fund, the full investment value is available as a lump sum. The retirement benefit will be payable at the preservation fund’s maturity date. If the member is unemployed, then the retirement benefit may be payable earlier (but not before age 55 unless otherwise indicated by the rules of the transferring fund).

The retirement tax table applicable with effect from 01 March 2014 is as follows:

Amount of lump sum	Rate of tax
Not exceeding R500 000	0%
R500 001 – R700 000	18% of taxable income exceeding R500 000
R700 001 – R1 050 000	R36 000 plus 27% of taxable income exceeding R700 000
Exceeding R1 050 001	R130 500 plus 36% of taxable income exceeding R1 050 000

 

Death Benefits:

On death in service, the full value of the investment will be payable. This may be payable as a cash lump sum.  It is advisable to nominate a beneficiary to prevent the benefit from falling into the deceased’s estate, where delays may occur.

However, as is the case with all retirement funds, the trustees first have to determine who the legal and factual dependants are (in terms of Section 37C) and their personal financial circumstances. Then they have to apportion the benefit according to needs. Should there be any funds remaining then the needs of nominated non-dependent beneficiaries will be taken into account. Otherwise the proceeds are paid to the estate.

Note: A “dependant” is defined to include both minor and major children, a spouse, a person who was factually dependent on the member and a person in respect of whom a member would have become legally liable for maintenance, had the member not died (e.g. an unborn child).

 

Disability Benefit:

If a member becomes disabled while a member of the preservation fund, the benefits are treated in exactly the same way as early retirement with the attendant tax advantages.

Ad-hoc Contributions

Ad-hoc contributions can only be made to a preservation fund as long as these contributions are from an approved transferring preservation fund. This may occur when an interim value is paid on withdrawal and an additional adjustment only paid some time later or when you withdraw from another employer’s fund.

Retirement Funds:

The main retirement savings products available to South Africans that are provided by employers are:

• Pension funds
• Provident funds
• Group retirement annuities

 

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Pension Fund

The objective of a pension fund is to provide employees with a regular pension in retirement.

If a pension fund member retires, the member could elect to receive a maximum of up to one-third of the total benefit in a cash lump sum. Pension fund members must purchase an annuity with at least two-thirds of their retirement fund. If your total retirement interest in the fund is less than R247 500, you are not limited to taking only one-third of your savings as a lump sum; you can take the full amount as a cash lump sum, subject to tax.

If you leave a company before you retire, for example where you resign, are retrenched or dismissed, you may have to move your retirement savings out of the company fund, either to your new company’s fund or to a preservation fund or to a retirement annuity fund or take a cash payout.  The cash payout will be subject to tax.

A pension fund is normally established by an employer for the investment of employees' retirement fund savings, contributed by the employer and employees. Each pension fund is governed by the Pension Funds Act and the rules of the fund. The rules of the fund are made up by the trustees who are elected to the board of the fund. These rules are approved by the Pension Fund Regulator.

 

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Provident Fund

The objective of a provident fund is to provide employees with a lump sum benefit at retirement. A provident fund is thus more flexible as employees can still purchase an annuity with their fund.

If you leave a company before you retire, for example where you resign, are retrenched or dismissed, you may have to move your retirement savings out of the company fund, either to your new company’s fund or to a preservation fund or to a retirement annuity fund or take a cash payout.  The cash payout will be subject to tax.

From 1 March 2016 the maximum permissible tax-free deductible contributions to pension and provident funds have been standardised. Employers can deduct unlimited contributions to their employees’ pension or provident fund.  These contributions attract fringe benefits tax that must be recovered from the employee.  The employee can in turn deduct all contributions (employer and employee contributions) up to 27.5% of gross remuneration or taxable income (whichever is the higher), subject to an annual cap of R350 000.

A Defined-Benefit Plan is where the retirement benefits are based on a formula using factors such as salary history and duration of employment. Investment risk and portfolio management are entirely under the control of the company. There are also restrictions on when and how you can withdraw these funds without penalties.

A Defined-Contribution Plan is where a certain amount or percentage of money is set aside each year by a company for the benefit of the employee. There are restrictions as to when and how you can withdraw these funds without penalties. There is no way to know how much the plan will give the employee upon retiring.  This gives rise to the risk of inadequate contributions as well as investment risk . The amount contributed is fixed but the benefit is not. Normally in these schemes the employee is given an option in which portfolio to invest since they have the risk that the sum at retirement will be insufficient for the pensioner's needs.

In both defined-benefit and defined-contribution schemes, there may be not only the employer contributions but also employee contributions. Employees make contributions to an account. Contributions are deducted from the employee's salary. Some companies match these payments while other companies give a fixed percentage of salary. Governments give tax relief to these payments in the form of rebates or deductions in the tax payable. Governments do not want older people dependent on social welfare and it is therefore in their best interest to give these tax breaks.  A second consideration is that retirement funds invest heavily in the infrastructure of a government and so stabilise an economy.

The debate between umbrella and stand-alone retirement funds has raised a number of varying opinions in the retirement fund industry.  However, the current trend in South Africa is definitely heading in favour of umbrella funds. There is no right or wrong when deciding which platform to use as an employer.

The key and most obvious difference between an umbrella and stand-alone retirement fund is that an umbrella fund is a fund whereby multiple employers contribute towards one fund while the latter serves a single employer. Each fund carries its own advantages and disadvantages and each employer needs to carefully consider the advantages and disadvantages of each platform when considering the retirement planning for its employees.

 

Stand-Alone Retirement funds

A retirement (pension or provident) fund is a legal entity, separate from the employer and service providers. All contributions and investments are held by the fund in the name of the fund. A stand-alone retirement fund is appropriate for very large employers who do not need to pool assets to obtain benefits of scale.  The key advantage of a stand-alone fund is control over the board of trustees and the appointment of service providers. A stand-alone fund with less than R200m in assets is unlikely to be cost-effective and an umbrella fund may be more appropriate.

Stand-alone funds may be an appropriate option to an employer with unique operational characteristics. For example, where non-profit organisations cannot guarantee consistent employee salaries as it is dependent on donations, the fund rules can be adjusted to accommodate inconsistent contributions in this unique situation. It is however important that the employer has the necessary resources and members to justify the setup of a stand-alone fund.

 

Umbrella Retirement funds

Umbrella funds are vehicles for saving for retirement. They differ from traditional retirement funds in that they pool together the pension savings of employees from a number of employers rather than just one employer and its subsidiaries, in order to derive benefit from economies of scale.  Umbrella Funds usually have lower fixed and variable costs per member due to their size. These cost savings ultimately translate into enhanced retirement benefit payments to members. Umbrella funds can be suitable for small, medium and large employers.

The benefits to members and employers who participate under umbrella fund arrangements are considerable. Most notably, employees enjoy cost savings which translate into improved investment allocations. The fund often has the power to negotiate competitive administration, investment and other fees from their service providers, leading to a higher net return on investment for the members.

A further advantage is that the employers’ obligation of structuring and governing the fund is waived to a degree. Umbrella funds are generally governed by an independent and industry experienced board of trustees, providing the members more assurance in terms of good governance of their life investment.

Choosing an umbrella fund also benefits the employer, seeing that most employers want to attract and retain good staff members, and an affordable retirement savings scheme is an attractive benefit to prospective employees.

 

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Annuities

There are various types of annuities available to you.   In the insurance context, an annuity is a contract between an insurance company and a client whereby, in return for a lump sum investment, the insurer pays periodical income (which may be deemed to comprise payments of capital and interest) to the annuitant in accordance with the terms of the contract.

Retirement funds enjoy certain tax advantages over the duration of active membership of the fund.  As a result of the tax relief obtained by the member prior to retirement (or death), the full annuity income (pension) payable from the annuity is taxable.

The monthly income/pension is taxable at marginal rates and will be subject to SITE tax or, in the case retirement annuity funds, to PAYE only.

Retirees have the option to commit their retirement funds to two types of investment vehicles:

• A traditional conventional life annuity or
• An investment-linked living annuity (ILLA).

The first option, commonly known as a conventional annuity, is a lifelong policy that pays a guaranteed income based on the amount invested.  Investors can choose an income that increases to offset the negative effects of inflation, although this option requires a higher initial capital outlay or a lower initial income benefit.  Here retirees only have to ensure that the income payments are sufficient to cover their income needs.

Types of Conventional Annuities

There are three broad types of annuities, namely:

i     Life Annuities – the payment of the annuity instalments is contingent upon one or more annuitant’s lives, ceasing on death.  A guaranteed term may be selected to provide an element of protection of the capital.

ii    Term Certain Annuities – the payment of the annuity instalments continues for a defined period.

iii    Temporary Annuities – are payable for a defined period or till the earlier death of the annuitant (e.g. if Joe buys a 10-year Temporary Annuity it will be paid for ten years or until Joe’s death, whichever occurs first).

The second option is the popular Investment Linked Living Annuity or otherwise known as Flexible Annuities.  This living annuity is constructed on a very different basis to conventional annuity.  The lump sum is typically invested in a market linked portfolio and not a smoothed type portfolio.

The risk of the investment not meeting the retiree’s requirements remains with the investor. This makes the pre- and post-retirement decision even more onerous as one has to consider growing capital to beat inflation, while drawing sufficient income to maintain one’s standard of living.

A living annuity is a contract established with a management company, whereby the annuitant may elect to receive an annuity income of amount equal to a return of between 2.5% and 17.5% on the capital in the fund from year to year.  As such the annuitant has the flexibility to increase or decrease his or her income on the annual anniversary date based on his or her personal needs or, where appropriate, the investment returns achieved. 

On the death of the annuitant, the remaining balance will be paid to his or her nominee or estate. The nominee may elect to receive the capital remaining in the investment as an income.

It is important to note that living annuities are not suitable for all investors and all factors pertaining to this product should be taken into consideration.

One of the primary factors which should be taken into consideration is that the annuitant assumes the mortality risk, as the capital might not be sufficient to provide an income for the duration of the annuitant’s lifetime.

The annuitant must select the level of income ranging between 2.5% and 17.50% each year.  This decision/election should be made taking into consideration the returns achieved by the underlying investment returns of the portfolio.  Therefore, should the annuitant select an income that is higher than the returns achieved on the portfolio, the capital will be eroded over time and could be depleted prior to the death of the annuitant and/or spouse.

To summarise, the living annuity offers you –

• A choice of income
• Potential for capital growth
• An investment portfolio that suits your risk profile
• The option to continue caring for your beneficiaries

 

Determining you Income

The income selection under the linked life annuity is calculated differently to that of a conventional annuity. For a living annuity (life annuity) it is the investor’s responsibility to select the initial income rate and this selection is reviewed on an annual basis. We highlight the importance of this selection here below.

Preserving the underlying capital of your life annuity is crucial to ensuring that your recurring income can be sustained over your lifetime. The underlying capital, and the income, is not guaranteed in any way. You are responsible for the sound management of your investment, ensuring that your individual requirements are met. The preservation of the capital is influenced by:

Level of income

Your living annuity investment provides you with the flexibility, within the constraints imposed by the relevant authorities from time to time, to select your income to best suit your personal, financial and retirement needs. It therefore forms a key part of your own retirement income planning process and portfolio.

Living annuities should provide you with an income for life, and it is your responsibility to ensure that the level of income that you have selected is at a level that would be sustainable for the rest of your life.

The table below shows indicative initial annual income levels for guaranteed single life annuities, with a 5% escalation rate and no guaranteed term, for different ages.

 

One is encouraged to compare your current income rate to the percentage rate reflected in the table for your age.  If your drawdown percentage under a living annuity is above the rate reflected in the table, you may be at risk of not having enough capital to support such a level of real income for life.

It is important to note that the table is based on life annuity rates where the insurer carries the full investment and longevity risk, in contrast to a living annuity where you carry both of these risks in full.

If you survive for a longer period than the average life expectancy on which these rates are based, or your investment return is poorer than the return on which these rates are based, or your expense inflation is higher than those on which these rates are based, you could also deplete your capital.

Underlying investment options

When constructing your investment portfolio, bear in mind that the type of investment options chosen will have a big impact on the preservation of the underlying capital in your annuity.  Investment options that include high exposures to equities tend to have fluctuating capital values.  Investment options weighted towards fixed-interest investments however tend to have more stable capital values.  Clients seeking to preserve their capital at all cost should therefore be mindful of over-exposure to equity-based investments.

A combination of a high level of income with an equity-based investment portfolio can result in large capital losses during major equity market volatility.

The income drawn from your living annuity is not guaranteed and will be affected by the investment performance of the funds in which you have elected to invest.

Living Annuity Disclosures

• A living annuity allows policyholders to set income levels subject to constraints imposed by the authorities from time to time and allows one to invest in a wide range of assets.
• The level of income a policyholder selects is not guaranteed for life. The level of income selected may be too high and may not be sustainable if:
  • A policyholder lives longer than expected with the result that the investment is depleted before death; or
  • The return on the investment is lower than that required to provide a sustainable income for life.
• It is the policyholder’s responsibility (in consultation with their financial adviser where applicable) to ensure that the income that they have selected is at a level that would be sustainable for life. A policyholder’s income drawdown relative to the investment return must be carefully managed in order to achieve this.

The table below can be used as a guide.

Years before your income will start to reduce (in today’s money i.e. after considering inflation of 6% per annum)
		Investment Returns per annum (before inflation & after all fees)
		2.50%	5.00%	7.50%	10.00%	12.50%
Yearly Income Rate Selected at inception	2.50%	21	30	50+	50+	50+
	5.00%	11	14	19	33	50+
	7.50%	6	8	10	13	22
	10.00%	4	5	6	7	9
	12.50%	2	3	3	4	5
	15.00%	1	1	2	2	2
	17.50%	1	1	1	1	1

 

• It is important to note that the above table assumes that one will adjust the selected income percentage over time to maintain the level of income (allowing for inflation). Once the number of years in the table above has been reached, the income will diminish rapidly in the subsequent years.
• Please ensure that you understand what your financial adviser has explained in terms of both the advantages and risks of living annuities.
• These indicative rates are a general guideline and should be considered taking into account each policyholder’s financial situation and all other sources of income.
• Living annuities may be transferred from one insurer to another at the request of the policyholder. Such transfer will be subject to the provisions of Directive 135A (read with Directive 135) issued by the Registrar of Long-term Insurance or any replacement thereof or supplement thereto. A living annuity may also be converted to a conventional life annuity. The conversion will be subject to the provisions of Directive 135.
• Your investment portfolio contains investment instruments that have different levels of risk and return. It is thus important to consider the overall composition of your investment portfolio. Too high a proportion of volatile assets means there is a risk of losing capital; too low a proportion of volatile assets means there is a risk that investment returns will be too low to sustain the selected level of income.

If you are investing for the long term or if you are already paying income or capital gains tax on your existing investments, you can invest in unit trusts via a tax-free investment account and benefit from tax savings on your investment return.

The tax-free investment account is also a useful product for estate planning purposes. The maximum amount you can put into your account per tax year is currently R33 000 with a lifetime maximum of R500 000.

 

Tax benefits
The interest, capital gains and dividends you earn are completely tax-free.

 

Estate planning
Your investment can be paid to your beneficiaries immediately and there are no executor fees.

 

Investment Contributions
The maximum you can invest per tax year is R33 000, with a lifetime maximum of R500 000. These investment limits are for all tax-free savings and investment accounts you may have across different product providers. SARS will apply a 40% tax penalty on any amount you invest in excess of the maximum.

 

Withdrawals
You may withdraw from the account at any time. However, this withdrawal does not increase your annual and lifetime contribution limits.

Various management companies offer a product whereby the investor, via a single consolidated entity, has access to a range of unit trusts/investment portfolios from a number of managers through one administrative platform. The investor may switch from one unit trust/investment portfolio to another at their discretion without having to incur the cost of entry/exit.

Furthermore, the product not only offers capital growth potential but also the opportunity of capital withdrawals from the unit trust, as and when required.

 

Characteristics

This investment has the following characteristics:

Flexibility of investment

You, the investor, may choose to convert the investment from a capital growth to an income-generating investment to suit your specific needs.  This may be altered at your discretion at any time in the future.

Accessibility of funds

The total capital or a portion thereof is available to the investor by means of the repurchasing of units and this transaction should not take more than 7 days to complete once all relevant documentation is submitted.

 

Flexibility of risk profile

As your specific needs change or as the general economic conditions dictate, the risk profile of the investment may be altered. (e.g. from aggressive to moderate or to conservative).

 

Income tax

The interest earned on the portion of the investment that holds interest-bearing instruments is taxable in the investor's hands.

 

The investment is also subject to dividend tax.  Unless the investor specifies otherwise, the administrator will treat all account holders as individual South African residents for Dividend Withholding Tax and the account will attract the default dividend tax rate.

 

Capital Gains Tax (CGT)

The growth of the investment (on disposal/sale) is subject to CGT. Switching from one investment fund to another will be considered as a sale and will trigger CGT implications. (This however is not the case for switches performed by the investment manager within a fund-of-fund portfolio.)

 

Death benefits

In the event of your death the investment forms part of your estate and may be subject to estate duty. No beneficiaries may be nominated and you will therefore need to bequeath the investment in your Will.

If your marginal income tax rate is higher than 30% and you want to benefit from tax savings, you can use an endowment for your long-term saving goals.  It is also a useful product for estate planning purposes as your beneficiaries can receive your investment immediately and there are no executor’s fees.

 

Important parties involved in the policy

 

Policyholder (You)

The party(s) who legally owns the policy.

 

Life assured

The policy is issued on the life of this person(s) and comes to an end when they die. If there is more than one life assured, the policy will end when the last life assured dies.

 

Last life assured

The life assured under the policy who outlives the other life assureds (if any). The policy ends when this person dies.

 

Beneficiary for ownership

If the policyholder and the life assured is not the same person or if there is more than one life assured, you may nominate a beneficiary for ownership to become the owner of the policy after your death.

This only applies if the policyholder is a natural person. If there is more than one policyholder, each policyholder may nominate only one beneficiary for ownership.

 

Beneficiary for proceeds

If the policyholder is a natural person and is the only life assured, you may nominate a beneficiary for proceeds to receive the proceeds of the policy after your death.

 

Who gets the proceeds when the last life assured dies?

Surviving policyholders will receive the proceeds. If there are no surviving policyholders, the proceeds will be paid to the beneficiary(s) for proceeds. If no beneficiaries are nominated, the proceeds will be paid into the estate of the policyholder.

 

Restriction period

Legislation that governs an endowment, imposes a restriction period in which there are restrictions on the withdrawals you may make from the policy.

This applies to:

• The first five years of your policy, or
• Five years from the first business day of any month during which the 120% rule takes effect.

The 120% rule takes effect when your contributions in any policy year are greater than 120% of the higher of any of the previous two policy years’ total contributions. The product provider will accept these contributions into the same policy and extend the restriction period (if you are already in a restriction period) or start a new five-year restriction period on the entire policy.

 

Withdrawals

You are allowed only one withdrawal during the restriction period.

This withdrawal is limited to the lesser of:

• The restricted amount i.e. your contributions during the restriction period, including any market value in the policy the day before the restriction period started, plus 5% compound interest; or
• The market value of the investment less fees and charges.

Credit life insurance is a type of life insurance policy designed to pay off a borrower's debt if the borrower dies.  The face value of a credit life insurance policy decreases proportionately with the outstanding debt amount as the debt is paid off over time, until both reach zero value.

This cover may also be set up on a group basis whereby a group credit life assurance scheme may be put in place.

The group policy covers loans advanced by the credit provider that offer credit facilities to third parties such as individual clients, trusts, partnerships and/or companies.

The main objective of the group credit cover is to provide a capital sum on death of any member of the scheme, equal to the loan outstanding in the books of the credit provider at the time of death of the member.

A loan cover may be extended to provide a capital sum on the total and permanent disability of any participating member of the scheme equal to the loan outstanding in the books of the credit provider at the time of the total and permanent disability of the member.

At some point or another everybody thinks about preparing a Last Will and Testament. Most people know that they will need a Will and many intend to make out their Wills yet surprisingly most people never do.

Some are of the view that they do not need a Will as they do not have substantial assets. Others do not prepare Wills for reasons that range from simple laziness to discomfort at the thought of one’s own death.

For many, thinking about their own death makes the concept real. As long as they can avoid thinking about it, they can ignore the inevitable.  Unfortunately, failing to plan for one’s death won’t prevent it from happening.

It is often said that the only thing certain in life is death and taxes.  Taking this into account, would you really feel comfortable leaving your assets for someone else to handle?

There are many reasons why you should have a valid Will at all times. It is important to ensure that upon death the right people should benefit from your estate. Also, with a Will, you have the right and ability to appoint executors of your choice.

By making and leaving a Last Will and Testament you are in a position to decide and instruct how your assets are to be distributed and dealt with after your death.  In this way, you can ensure that only the people you choose will benefit from your estate and you can accordingly exclude people that you would not want to benefit.

By making a Will, you thereby ensure that the distribution of your estate would be in accordance with your wishes.

Should you however die without leaving a valid Will, your assets will be divided and distributed according to the Law of Intestate Succession as opposed to your own wishes and directions.

Invariably, the distribution of your assets in this event will, in all probability, not be what you had intended.

If you decide at some stage of your life to dispose of and divide your estate after your death, then you must make your wishes known in your Last Will and Testament.  The Wills Act regulates the formalities of drawing a Will and determines who may make a Will.

The importance of a Last Will and Testament cannot be overstated. A Will is arguably the most important legal document that the average person will ever sign. Many people incorrectly assume this is solely the domain of the wealthy.  A Will directs the distribution of assets at death.  Under this logic, presumably those with limited assets think they need not worry about how it will be distributed. This is a mistake regardless of how much or how little assets someone has.  A Will gives that person control over what happens to their assets.

Do not wait until it is too late - make the necessary preparation to take care of the ones you care for.  Let us help you draft your Will today!

A wrap fund is a portfolio consisting of underlying collective investment funds managed or “wrapped” according to a specific investment mandate.

In association with SMMI and Glacier Invest we have created several different risk profiles to guide the creation of tailored investment solutions, appropriate for clients with certain risk profiles. 

These ‘model’ portfolios are run by a professional investment committee headed up by an investment professional and of which we, as your financial advisor, will form an integral part. 

Your portfolio will be implemented and continuously monitored by this team of investment professionals. The investment committee allows us to perform a far more thorough investigation and detailed analysis of your portfolio’s funds in a disciplined, structured manner.

We also benefit from specialist asset manager and economic research undertaken by the Glacier research team and that of Sanlam’s multi-manager business, one of the largest multi-managers in South Africa. We then overlay this research with clearly defined investment guidelines, appropriate for your particular risk profile.

 

Download the full Brochure in: English

In association with Safrican Insurance Company we have created the Seed Umbrella Funeral Scheme, providing an individualised and solution-driven approach to an employer funeral benefit solution.

This is an employer funeral package which offers participating employers the means to provide their employees, whether permanent or seasonal workers, with a funeral benefit.

 

Download the full Brochure in: English or Afrikaans