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.