Treasury slams high cost of annuities

Johannesburg – Drastic changes to annuity products will herald a better deal for consumers and cause a shakeup among those providing conventional life annuities.

In the first of two discussion documents on reforming the retirement industry published by Treasury on Friday, radical changes to annuity products are proposed in order to remove “structural shortcomings” in retirement annuities.

This could have far-reaching consequences for providers of annuity products as well as financial advisers.

To bring down the cost of life annuities, Treasury proposes that they be replaced by a retirement income trust (RIT), which does not allow for investment choices. RITs will be modelled along the lines of unit trusts and will be more transparent and understandable that life annuities.

Underlying investments will have to comply with investment regulations for pension funds and commission payments to advisers will be strictly limited.

This will mean that advisers’ commissions will fall dramatically.

An adviser’s commission is one level of charges that results in a great portion of the contributions to annuity products being used to cover costs, instead of producing an income after retirement.

Financial advisers who sell life annuities can currently demand commission of up to 12% of the initial value for their advice.

The proposed changes will also be a heavy blow to those who supply annuity products, who last year sold an estimated R31bn worth of these products.

One of the proposals is that more suppliers be permitted to sell annuities, as to bring about greater competition and lower costs.

Treasury proposes a lifting of the restriction that only companies licensed as life assurers may offer life annuities.

It suggests that conventional annuities be used as a product into which pension fund members’ accumulated pension benefits be invested by default, and that members select the default option based on different quotations from various product suppliers.

In the second discussion document Treasury found a golden mean: introducing the compulsory preservation of pension benefits while still permitting premature withdrawals.

The most important proposal regarding the preservation of pension benefits is that the accumulated benefits of current pension and provident fund members will be subject to the conditions currently in place.

The compulsory preservation of two-thirds of the accumulated benefits for new members will apply only after the proposed preservation of pension benefits act comes into force.

Interested parties have until November 16 to comment on the discussion documents. The complete documents are available on the website.

- Sake24

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