The majority of South Africans who reach retirement age have made inadequate provision, and the issue is being compounded by people being forced to retire earlier, according to a new report by Sanlam investment plan, Glacier.
With the advance of medical technology, people are now outliving their capital – and with the prospect of equities and other growth assets outperforming guaranteed rates, retirees tend to favour living annuities in pursuit of a higher income.
This could prove disastrous, the report warns.
The issue of longevity
According to Glacier, people are generally living longer and most will live longer than they might think.
“Research has shown that in the case of a couple aged 65 today, there’s a 50% chance of one of them reaching the age of 94. There’s also a 25% chance of one of them living until 100,” said Rocco Carr, Business Development Manager at Glacier.
The report notes that this will only increase as technology advances further and life expectancies continue to climb.
“One field that will likely change the medical profession is 3D printing. (Researchers believe that) 3D printers could be used to print organs for human use within 15 years,” said Carr.
“They are set to print other organs, and are now talking about making a kidney, a liver. It is now at the lab level, but it will allow the development of the bioprinter itself.”
|Chance of Survival||65 year old male||65 year old female||65 year old couple|
|50%||85 years||89 years||94 years|
|20%||93 years||97 years||100 years|
|10%||100 years||104 years||106 years|
Longevity and Investment-linked living annuities (ILLAs)
Increasingly, longevity will also introduce previously unforeseen risks associated with an ILLA, noted Glacier’s report.
“The oldest ILLA is currently roughly 20 years old, far shorter than the period most people would need it to provide them with a post-retirement income,” said Carr.
“Studies have shown that as long as the income level drawn can be supported by the growth in the underlying assets and the actual lifespan of the client, the investor will be able to draw a sustainable retirement income.”
However, when the client takes more than this level, the longevity risk (risk of outliving one’s capital) becomes a serious consideration, said Carr.
“If one considers the typical projected income graph from an ILLA, taking an initial income of 6.7% with an annual income growth rate of 5%, the longevity risk is obvious, as can be seen in the following graph, which shows the projected income in nominal terms.”
As such, it’s clear that the ILLA may not be the optimum solution in these circumstances.
“But with the stark reality that clients have not saved sufficiently for retirement, locking their investments into a fixed-rate annuity may also not be the solution,” said Carr.
“We need to consider alternative solutions such as with-profit annuities where the clients’ investments can participate in the fortunes of growth assets and still be safeguarded from longevity risk.”
“But of course the issue investors often have with this option is the starting income is not sufficient to replace their working income and they do not like the idea of capital being forfeited when they die.”
“Whilst many clients choose the ILLA to leave an inheritance, should the they live too long, the only inheritance the children may end up with is supporting their parents and their medical bills. Clients have to realise that their pension fund should supply them with an income and that any inheritance is an additional benefit.”
What are your options?
Carr suggests that South African’s should instead look to a combination of plans to help ease the burden.
However, options such as with-profit annuities are not replacements for the ILLA and certainly should not be positioned as being better than the ILLA, he said.
“A clients’ particular circumstances – age, health, income needs, family responsibility, etc should ultimately determine the appropriate retirement income options.”
While there is no magic wand that can right the savings ills of clients, combining different annuity options can optimise the client’s retirement income,” Carr said.