A new entrant in the life assurance market offering underwritten annuities (monthly pensions) is likely to shake up the retirement market and focus attention on the fact that lower earners and people in poor health can get a higher guaranteed income for life from an enhanced annuity than they can from a regular annuity.
A wholly-owned subsidiary of Just Retirement in the United Kingdom, Just Retirement South Africa, this week launched three underwritten, or enhanced, guaranteed annuities (which provide a guaranteed income for life) for South Africans.
Just Retirement South Africa’s chief executive, Deane Moore, says the company expects that its enhanced annuities will enable about two in five people buying a pension to get an income of between 10 and 30 percent more than they could get from a traditional assurer just by answering a few questions about their lifestyle and health.
Just Retirement is the second life assurer in South Africa to offer enhanced annuities. Paramount Life, which operates on the life assurance licence of Guardrisk, a subsidiary of the MMI group, says it is able to offer four out of five retirees with retirement savings of R1.5 million or less a better income than they could get from a non-underwritten annuity offered by an established assurer.
Paramount Life’s chief executive, Jason Sharp, says Paramount’s experience is that three out of five retirees with less than R1.5 million and two out of five retirees with more than R1.5 million can get an income from an enhanced annuity that is at least 10 percent higher than a non-underwritten one.
In its discussion papers on retirement reform, National Treasury has noted that large players in the annuity market risk-rate only on age and gender, and their products offer poor value to low-income earners and people in ill health. Many of these people use investment-linked living annuities as an alternative, even where these may be inappropriate, particularly for retirees who have small amounts of capital to invest.
At retirement, legislation requires members of pension and retirement annuity funds to buy an annuity with at least two-thirds of their retirement savings.
Statistics show that 85 percent of retirees choose living annuities, where your savings are invested in financial markets and you withdraw a portion of the returns and capital as a pension. With living annuities, there is no guarantee that your savings will provide a sustainable income for life, and you carry the risk that you could outlive your capital or that poor returns could erode it.
You can switch from a living annuity to a guaranteed annuity, but once you have bought a guaranteed annuity you cannot change it, because it is priced for your life.
Moore says that, to be fair, if you had to pay higher premiums for your life cover while you were working because of a higher risk of early death, you should benefit from receiving a higher income in retirement because of your shorter life expectancy. This would apply to low-income earners, people in poor health, smokers and heavy drinkers.
Higher-income earners typically live longer because they tend to perform less physical labour and eat more nutritious food and they can afford good-quality medical care.
In draft regulations under the Pension Funds Act released last month, Treasury proposed that retirement funds be required to set up default annuities for fund members who reach retirement without knowing what type of pension they want to buy.
Treasury proposes that the defaults be guaranteed annuities from life assurers and, if a living annuity is offered, that it is offered only by the retirement fund itself. In the explanatory memorandum to the draft regulations, however, Treasury again notes that guaranteed annuities are expensive for retirees with shorter life expectancies.
Moore says Just Retirement has entered the South African market specifically to address this issue through enhanced annuities and that its offering is well-timed.
Just Retirement has been operating in the UK since 2004, and has built up experience in pricing underwritten annuities for people with different illnesses, Moore says.
British retirees invested R24 billion in the enhanced annuities of Just Retirement’s UK parent company last year, while local life assurers received only R5 billion for guaranteed annuities last year.
Paramount Life has been operating in South Africa for the past six years.
Buying an underwritten annuity does not necessarily mean you have to go for a medical check-up. Just Retirement has a questionnaire with eight questions that are aimed at identifying whether you suffer from one of the major illnesses, such as a heart condition, diabetes, stroke, cancer or a chronic lung disease. You also have to disclose the medications you take and whether you have been admitted to hospital within the past five years.
Moore says Just Retirement will require you to go for a medical check-up only if you are unable to provide accurate information about your health, or if you have a complicated medical condition.
Sharp says Paramount Life can obtain the medical information it requires for a quote telephonically and may verify this information at a later stage.
The three kinds of guaranteed annuities that Just Retirement is offering to South Africans are:
- An inflation-linked annuity, which increases each year in line with the inflation rate;
- An annuity that increases by a fixed percentage each year, up to 10 percent; and
- A level annuity, where the monthly pension does not increase throughout your retirement.
Any of the three guaranteed annuities can include a pension for your spouse if he or she outlives you (a joint annuity). If you choose a joint annuity, your spouse will also have to answer questions about his or her health, because the pension you and your spouse receive will be based on the health of both of you.
The annuities can also include a guarantee period of up to 10 years, which means that the pension will continue to be paid to your heirs for a certain period if you die before the guarantee period expires. The guarantee ensures that you, or your heirs, will be paid at least a certain amount from the money you invest in the annuity.
Paramount offers these traditional annuities, as well as a living annuity. Rather than an annuity with a guarantee period, it offers a linked life policy that ensures a guaranteed payout, which you can cancel.
Moore says Just Retirement is working on an annuity product where increases will be linked to investment performance.