Nicolette Dirk, finance writer, Justmoney
South Africans have significantly upped their retirement savings efforts last year, resulting in strong premium growth for retirement annuity (RA) policies in 2013.
This is according to Peter Dempsey, deputy CEO of the Association for Savings and Investment South Africa (ASISA).
“Over the past three years consumers have shown a renewed appreciation for the benefits offered by RA products.
This indicates that concerted efforts by Government, the media and the savings and investment industry to highlight the importance of retirement savings in light of the country’s poor savings rate are paying off,” said Dempsey.
He added that new recurring RA policy premiums grew by 29% to R2.2 billion in 2013 from R1.7 billion in 2012. Single premium RAs saw a significant growth in premiums of 37% last year from R6.2 billion in 2012 to R8.4 billion in 2013.
Louise van der Merwe, financial planner at Wealthup, said a retirement annuity is a great vehicle if used correctly. You can manage to save a lot of tax and boost your retirement planning.
“Any retirement plan should start with a holistic approach of all the assets that can generate a required income at your required retirement date,” said Van der Merwe.
Covering life risks
In 2013 consumers took out 5.3 million new individual risk policies, paying monthly premiums of R10 billion for the year to cover events such as death, disability and dread disease. In 2012 consumers took out five million risk policies worth premiums of R8.8 billion. This represents a 13% increase in risk policy premiums for 2013 and a 6% increase is the number of policies bought.
Dempsey said that while any increase in risk cover is good news, a 6% growth in policies is not enough to close South Africa’s critical insurance policy gap.
“In 2013 the insurance gap, which is the difference between existing life and disability cover and the actual insurance need of South African earners, widened to a staggering R24 trillion.
This translates to an average life cover shortfall of R700 000 per average income earner and a disability cover shortfall of R1.1 million,” said Dempsey.
Beneficiaries of individual policyholders who had death and disability cover in place in 2013 received benefit payments worth R26.7 billion from the life insurance industry. Group policies paid out death and disability benefits of R13.8 billion in 2013.
Benefit payments provided much needed financial assistance to the families of policyholders who either died or became disabled.
In 2013, the total benefits paid to policyholders, beneficiaries, and pension fund members as a result of death and disability claims, maturity pay-outs and pension, annuity and other payments amounted to R321.3 billion. This is 27% more than in 2012, when total benefit payments amounted to R252.2 billion.
Investing in retirement
Living annuities maintained their popularity in 2013, recording a 29% increase in new single premiums from R27.4 billion in 2012 to R35.4 billion in 2013.
Van der Merwe said that when it came to investment options, there are no restrictions inside a living annuity and you can invest in unit trusts or direct shares.
“You can have 100% offshore exposure or 100% equity, if this suits your requirement. It is important that the investment portfolio matches your risk requirement, risk tolerance and risk capacity,” said Van der Merwe.
Meanwhile, compulsory annuities only saw 5% growth in new single premiums from R4.3 billion in 2012 to R4.5 billion in 2013.
“The equity market performed well, which is good for living annuities. At the same time low interest rates meant lower annuity rates. This made compulsory annuities a hard sell.
Unfortunately living annuity sales are also driven by demand from consumers who have not saved enough for their retirement and who turn to living annuities for the wrong reason,” said Dempsey.
Being able to draw a higher income from a living annuity than would be available from a traditional compulsory annuity may help someone who does not have enough retirement capital to maintain a certain lifestyle in the early years.
But Dempsey warned that hardship will follow when the capital has been depleted over a short period of time.