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Mickey Gambale

June 2013

Momentum Wealth

Happy living – which is the right annuity for me?

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Contents

Presentation Disclaimer

The calculations used in this presentation are for illustrative purposes only. The information used for these calculations is based on assumptions utilised to further the understanding of the calculations.  This is not the official position or opinion of Momentum and its employees. Momentum will accept no responsibility whatsoever for any loss caused by negligence or otherwise, including without limitation any direct, indirect, punitive or consequential loss resulting from the use of this information or the calculations.

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Contents

• Regulatory / industry developments: “in search of a sustainable annuity”

• Are pensioners coping with realities?

• Guiding factors to consider

• Is any annuity going to pay you enough?

Contents

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Regulatory / industry developments: “In search of a sustainable annuity”

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National treasury and retirement reform

Treasury released a number of overview discussion documents in where they outlined the following high-level considerations:•Costs of retirement funds and related vehicles

•The costs and risks for post-retirement income vehicles

•Preservation, portability and uniform access to retirement savings

•Savings and fiscal incentives – possible alternatives to encourage savings

•Harmonisation of tax treatment of contributions

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National treasury and retirement reform• Reform proposals aim to extend the responsibilities of trustees to guide

members through the retirement process,• Requiring them to make a default retirement product available• Default could be a guaranteed, living or hybrid annuity• Option to opt out of the default with their entire retirement balance• Trustees will be given some protection in respect of the default• An FSB directive is expected outlining the minimum requirements that

Trustees must meet.  • The final round of consultation is intended to be completed towards the

middle of the year, with the first changes expected to be implemented from 2015 and forward.

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ASSA Convention 2012: In search of a sustainable retirement income

Source: Lodhia & Swanepoel 2012: Living versus Guaranteed annuities: In search of a sustainable retirement income

GAs better equipped than LAs to provide an inflation linked income for life, because: 1. Impact of mortality pooling and the drawdown cap:

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Industry conclusions

Are living annuities appropriate products?

• The financial adviser will assist clients in making suitable investment decisions

• “Accused of mis-selling living annuities to reap commissions” – from Actuarial Society Convention

• “Where was this research when we were being told to sell living annuities by the product houses?”

Financial advisers

The Media’s interpretation

• “Headlong plunge by 85% of retirees into living annuities at retirement could be creating a generation of impoverished pensioners”

• Living annuity 'not your best first choice' - Personal Finance Retirement

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Are pensioners coping with realities?

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Poor decision making

Is it possible that some clients and their financial advisers do not understand the risks embedded in LAs?

Shady Pines retirement village

Most presented with a retirement based on conventional life annuity face a grim retirement from day one

Why so many taxpayers moved over to LAs and then failed?

Changing economic and investment cycles

We live in a different world with interest rates < half those 20 years ago

Medical costs

just one major setback in a family is enough to severely dent most retirement plans

Increased energy prices

Only a Ponzi Scheme has any prospects of yielding an after-tax return that can keep pace with today’s Eskom increases

KIPPERS

Kids in Parents’ Pockets Eroding Retirement Savings. Many LAs overdrawn to support family rather than pensioners

Why should I trust insurance companies

Why should I work for 40 years to give my money away?

*Sunday Times: Money & careers by Matthew Lester

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Guiding factors to consider

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Is it fair to compare a life and a living annuity?

If you’re comparing life annuities to other investment products such as a living annuities, you’re making a classic mistake!

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Mistake 1: focusing on returns• The market sells returns - people misunderstand life annuities because

financial experts and the media have focused on saving for retirement and, to a large extent, investment returns and “return management,” rather than risk management and, specifically, the risk of outliving one’s assets.

• Allowing prevailing interest rates to be a deal-breaker. It’s true that lower interest rates can mean a lower pay out, but the reason to buy an annuity is because you want the absolute insurance of having that income in your bank account every month for life.

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Mistake 2: failing to annuitize

• Perhaps the biggest mistake is simply failing to annuitize assets to create a guaranteed stream of retirement income.....

• A focus on historical returns may make life annuities seem like a bad deal. But that may change going forward

• The last decade showed us that though it was fairly easy take money from a portfolio and have that portfolio survive for a long time this may not be the case going forward

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Mistake 3: unfair comparisons - costs• Assess the value of a annuity as though all of its costs are nothing but pure

overhead is wrong

• Life annuities costs include charges for the transfer of risk. Living annuities costs are ongoing risk and portfolio management

• Any insurance product on the planet will not pay off on average. That’s something IFA’s need to recognize when we analyse risk-management strategies

• Insurance costs shouldn’t be ignored neither should investment costs. They might be too high or too low. But insurance shouldn’t be compared to investment products

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Living vs.. Life annuities, should they be compared Living annuities•Provides for an income linked to investment portfolio

•Flexible drawdown range 2.5% - 17.5%

•The flexibility of the offering enables you to enjoy the potential growth if the market performs

•It is an investment and not an insurance product

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Living vs.. Life annuities, should they be compared

Life annuities•Pass on all the risk to life companies

•The benefits of pooling works in your favour, but equally so against

•You should have saved enough to get a good starting income

•Life annuities are a insurance and not a investment product

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You have sufficient capital at retirement and you want flexibility

You want to benefit from the mortality benefits offered by risk pooling

You have access to skilled, trusted and independent financial advice

You require a known guaranteed annuity with no investment risk during retirement

You want to leave a financial inheritance when you die

You don’t want to run the risk of out living your income for the rest of your life

You would like to be involved in decision making during retirement

You have a life expectancy < 15 years

Consider a LivingAnnuity if

Consider GuaranteedAnnuity if

You are not married and / or you don’t care what happens to your money when you die

You have a life expectancy > 15 years

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Is any annuity going to pay you enough?

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It depends on how much you’ve saved. A life annuity isn’t a solution for saving too little, though it does protect you against running out of money

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Looking back on reality

Corporate John•Current salary at retirement R500k•Discount rate of 6%•Investment growth of 9% pa after fees (no tax)•Retires at age 65, wife 60•Worked for 40 years•Purchases joint life CPI linked annuity with 33% reduction on first death

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Looking back on realityCorporate John example:          

    Pre retirement post retirement realitypost retirement perfect 

preservation post retirement 75% netpost retirement 75% 

grossCTC / Salary  500 000   116 569   194 449   265 850   375 000 Pension    62 500   -     -     -     -   Tax    86 000   3 152   19 582   38 225   72 420 Medical    48 000   48 000   48 000   48 000   48 000              Deductions (tax, medical, etc.)  196 500   51 152   67 582   86 225   120 420 Net    303 500   65 417   126 866   179 625   254 580              Net salary pm  25 292   5 451   10 572   14 969   18 154              Expenses    25 000   14 000   14 000   14 000   14 000 Bond    8 000   -     -     -     -   Car    3 000   -     -     -     -   Insurance    1 500   1 500   1 500   1 500   1 500 Travel    2 000   2 000   2 000   2 000   2 000 Food    5 000   5 000   5 000   5 000   5 000 Municipal    2 000   2 000   2 000   2 000   2 000 Clothes    1 000   1 000   1 000   1 000   1 000 Communication  500   500   500   500   500 Entertainment  2 000   2 000   2 000   2 000   2 000              Surplus / deficit 292 -8 549 -3 428 969 4 154             Total pension at retirement 2 567 116 4 278 526 5 847 384 8 245 821 % of original   60% 100% 137% 321%Monthly % saved to achieve lump sum   12.50% 17.50% 24.00%

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Pensioners look back

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Where to from here?• Educate market to gain a better understanding of trade-offs between LA

and GA both by client and IFA• Retirees need to better understand the impact drawing down too much

income• Requirement for higher equity exposure and associated volatility if they

opt for a living annuity• How do we continuously support / monitor to ensure sufficient income

in retirement?• Engagement with requlators• Collaborate across product houses and industry players to create

innovative products and support one another

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“Human behavior flows from three main sources: desire, emotion, and knowledge. ” – Plato 424-348 BC

As the people in the know our purpose should be to create responsible solutions for stress-free living and a comfortable retirement for all our clients

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Thank you