I continue my exploration of annuity products bought with retirement savings that are designed to provide an income (pension). This week, I focus on advice, because in this, probably one of the most important financial decisions you make in your life, you need advice out of the top drawer.
Financial advice, as defined in our law, refers to advice you receive from a registered financial services provider, or representative thereof, that has the sale of a financial product as its objective. To quote the Financial Advisory and Intermediary Services (Fais) Act, it is “any recommendation, guidance or proposal of a financial nature furnished, by any means or medium, to a client or group of clients in respect of the purchase or investment in any financial product”.
A sales pitch, you might say?
Not so fast. Anyone giving advice according to the above definition must adhere to the General Code of Conduct under the Act, which among other things, requires that:
• Information provided is factually correct, avoids uncertainty or confusion and is not misleading;
• Advice is appropriate to your circumstances, risk profile and financial needs;
• Forecasts on product performance are reasonable and for illustrative purposes only;
• The terms and conditions of any products recommended – and circumstances under which benefits will not be provided – are fully explained to you;
• Any commissions, remuneration or incentives the adviser receives in relation to products or services provided are disclosed to you;
• Advisers avoid or, as far as possible, mitigate conflicts of interest between themselves and you, the client; and
• Advisers keep a record of written and verbal advice to you.
When you visit an adviser with what may be the biggest sum of money you’ve ever possessed or are ever likely to possess, you must be sure that the adviser acts to secure the best possible outcome for you. The adviser may adhere to all points in the code above yet still fail you, by telling you only about products that he or she is licensed to sell – in other words, by an act of omission.
If, after a brief introduction, the adviser says something along the lines of “We have the ideal product for you…”, you’re off to a bad start.
Only after all types of annuity have been fully considered, and you have discussed and assessed the pros and cons of each, can you and your adviser home in on a suitable retirement strategy. The list includes fund-endorsed (in-fund or out-of-fund), retail, life, with-profit, living, and hybrid options. (See: “The mind-boggling task of choosing an annuity” on IOL.)
Points of discussion
The more information you can provide about your personal circumstances and goals, and the more information your adviser can provide about the financial options available, the better decisions you are likely to make.
Among other things, you must deal with:
• Longevity risk: the risk of you or your partner living longer than expected;
• Investment risk: the risk that underlying investments will not perform as expected; and
• Inflation risk: the risk that your pension will lose buying power.
The strategy may involve a combination of products. For example, you may decide on a living annuity to start with, switching into a life annuity later in life. Or you may have a life insurance policy in the mix, to take care of a surviving spouse.
There’s also the question of advisers managing clients’ expectations. An adviser cannot keep you in a lifestyle to which you have become accustomed if you have not saved enough.
This is the point at which things can go awry. A client unable to accept a drop in lifestyle and an unethical adviser make a lethal combination.
As mentioned in an earlier column, life annuities are largely shunned in favour of living annuities, which give annuitants flexibility regarding income level and investment choice, but place on their shoulders the double burden of longevity and investment risk. Ongoing (at least annual) advice is a must if you have a living annuity.
A life annuity removes those risks. But whereas you can switch from a living annuity to a life annuity, once you’re in a life annuity, you’re literally in it for life.
Case studies
Two recent cases to come before the Fais Ombud illustrate a basic lack of knowledge about these products. Both annuitants believed life annuities to be flexible – that one could alter the level or frequency of annuity payments, or cancel the annuity and have access to the remaining capital.
Mr A bought a single-life annuity in 2017. In 2021 he needed money to pay an outstanding amount on his mortgage bond. Afraid he’d lose his home, he asked his adviser to facilitate an annual lump-sum payment from his annuity, which the adviser was unable to do. A complaint to the Fais Ombud confirmed that this was not possible in a life annuity product.
On retiring early, at 55, Ms B, a professional nurse, invested two-thirds of her R300 000 pension benefit in a compulsory annuity, ensuring a small monthly pension for life. She tried to boost her income by engaging in contractual work at non-government organisations, but was unsuccessful.
She approached an adviser about accessing the capital in her annuity, hoping to put it in an investment offering higher returns. As with Mr A, she found out that this was not possible, and her complaint to the ombud was dismissed.
“In both cases, our office couldn’t aid the complainants. A common issue in these cases is a misunderstanding of the flexibility and limitations of their chosen annuity plans,” the ombud’s office reported.
The office said that, when buying an annuity, consumers should conduct their own research. “Understand all available options and implications before committing to an annuity. This will allow you to ask questions of your financial services provider regarding any recommendations being made, putting you in a position to make an informed decision.”
* Martin Hesse is the former Personal Finance editor.
PERSONAL FINANCE