Throughout your life financial advisers want to help you save for retirement. But where are they when you need advice on retirement?
There is always a lot of talk about supporting people at the beginning of their working life to start saving for retirement, but very little is said about support for people who are close to retirement.
Is it time to beat the default paradox?
Karen Wentzel, head of annuities at Sanlam Corporate Investments, says you should imagine you are on a highway with guardrails providing a safety barrier that protects you from going off course, guiding you safely to your destination.
“However, when you retire, the guardrails come off, leaving you uncertain and in a way unprotected. Which direction should you take to ensure the rest of your journey is safe?”
She says that is what it is like for many employer pension fund members who rely on trustees’ selected portfolios for their savings up until they reach the big R.
“Then they choose to navigate this new, complex terrain alone, which can lead to suboptimal outcomes.
“The guardrails come off and uncertainty creeps in and this is the default paradox. At these critical junctures, well-timed retirement benefits counselling can make a massive difference in opening members’ eyes to their options. Trustees have a pivotal part to play in doing this member education.”
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87% rely on trustees up to retirement
Up until retirement, about 87% of members rely on trustees to select an investment portfolio for their savings.
Three-quarters of funds also have a target income in retirement they work towards, with 60% aligning their default investment option to this target.
This aims to stack the odds in a member’s favour to get them closer to their retirement goals.
The 2024 Sanlam Benchmark research shows that 71% of umbrella fund clients also believe in protecting members from market volatility as they approach retirement through, for example, a smoothed bonus portfolio.
The bottom line? The trustees put up guardrails in pre-retirement and members are happy to stay within them, Danie van Zyl, head of the Smooth Bonus Centre of Excellence at Sanlam Corporate, says.
Then members retire. Members have travelled the ‘default’ path to retire, but which path should they take next? How do they choose the right off-ramp at retirement?
“Retirement is a critical life stage point for members where they must make one of their biggest financial decisions, picking a path for their post-retirement journey (through an annuity. It also when members need the most help.”
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61% of retirees wish they had more support at retirement
Benchmark research shows most retirees (61%) wish they had had more support at retirement. Van Zyl says the reality is that most members are unaware of the post-retirement (trustee-endorsed annuity strategy) options and support that their retirement funds offer.
“This is where timely retirement benefits counselling could give members the direction that they need to make the right decisions to foster robust retirement outcomes. “
There are trustee-endorsed options that put the guardrails back, Wentzel says. “The onus is on trustees to increase awareness of members’ options in pre- as well as post-retirement, with proactive counselling and fund-supported advice to secure better outcomes for all.”
One of the ways trustees can provide ‘guardrails’ for members as they approach post-retirement is to introduce them to their carefully curated trustee-endorsed annuity solutions to provide an income in retirement, she says.
“These annuities are set up in line with Regulation 39 requirements and are often meticulously designed to balance cost-efficiency with financial security, making them a valuable resource.
“However, many members end up with more expensive products, as they are not aware of their fund’s trustee-endorsed annuity strategy solutions. Trustee-endorsed annuity strategy options can offer the ‘guardrails’ that members are looking for and need on their journey to post-retirement.”
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Main benefits of trustee-endorsed annuity strategies
The main benefits of trustee-endorsed annuity strategies are that:
- The solutions are designed and structured by professionals who understand the nuances of retirement
- They typically offer lower fees, prudent risk management and tailored strategies that align with a retiree’s changed financial goals and risk tolerance
- Where the default pre-retirement investments are geared towards accumulation, the trustee-endorsed annuity strategy options focus on longevity protection, cost-effectiveness and inflationary increases, as shown by Benchmark research
- These annuities are available at institutional pricing. Van Zyl says to put this in perspective, a paper presented at the Actuarial Society of South Africa’s 2023 Convention on the “Fairness of annuity pricing for low-income earners in South Africa” by Combrink and Taylor showed that the difference in pricing between an institutional and retail annuity vary from 6% to 27%. “Cost efficiency can make a material difference in a member’s monthly income and we are seeing two out of three members are missing this opportunity”
- While life annuities may not be the best option for everyone, they are worth exploring given the current climate. South Africans retiring with life annuities over the past 12 months have been benefitting ‘big time’ from the current high interest rates, which may soon be passing. This means members should seize the opportunity to ‘lock in’ great guaranteed escalation life annuity rates.
Wentzel says trustees should amplify awareness of these kinds of options, so that members can ensure that their hard-earned savings are protected and optimised, providing a secure foundation in their wind-down years.
“Much like guardrails on an unfamiliar road, trustee-endorsed options provide the necessary support and security to guide retirees through their retirement journey with confidence.”
