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Keeping rising RA costs at bay

May 07 2012 07:42
Mzwandile Jacks

THERE's some sobering news if you are planning for your retirement and have invested in a retirement annuity.

Falling bond yields, increasing longevity and higher expected inflation have forced life insurers to hike annuity rates, making retirement expensive, according to a Cape Town-based fund manager.

Johan Kriek of Coronation Fund Managers says increases in annuity rates are not confined to guaranteed annuities offered by life insurers, but also indirectly feed through to living annuities.

Guaranteed annuities make payments for a minimum period even if the member dies during that period. Living annuities allow members to make systematic withdrawals from the policy, without converting the annuity to a stream of income payments.

"Sustainable levels of drawdowns from living annuities are falling as pensioners live longer and earn less investment income, particularly in post-retirement strategies where a significant proportion of the assets should be invested in lower-risk portfolios," says Kriek.

"It is worrying that, despite the recent market uplift, the situation has remained as precarious." 

But, says Kriek, there are various options available to retirement annuity members that could go some way to rectifying the situation.

"We summarise these as 'saving more, for longer, in the right product, with the right manager'.

"Unfortunately not all of the available options will be easy or comfortable to adopt, particularly where retirement funding contributions are increased," he says.

Making the most of your options

Saving more is the most obvious way in which the increased cost of your retirement could be met, says Kriek.

"But given an environment where food and energy prices are rising and increasingly taking their toll on disposable incomes, it is difficult to envisage members being willing (or even able) to increase retirement fund contributions."

Saving for longer is also not a popular option, especially where it means postponing retirement by a number of years.

But it is a very effective way of making up any shortfall as more contributions are made, accumulated balances earn investment returns for a longer period and the post-retirement period is shortened.

"A second way to increase the period is by starting to provide for retirement earlier; unfortunately this option is only available to younger members," he said, adding being "in the right product", according to your ability to take investment risk, is essential.

He says as a rule of thumb, younger members have a higher risk tolerance as the period to retirement is expected to be long enough to cover entire market cycles.

In addition, the expected future contributions from younger members form a significant part of the eventual retirement lump sum, so the volatility of the combined retirement provision (savings accumulated to date plus expected future contributions) is much lower.

 - Fin24 

investing  |  retirement annuities



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