Retirement funds: options at maturity

Transcription

1 Retirement funds: s at maturity Existing Business Solutions MOM834/25E

2 A client invests in retirement annuities, pension and provident preservation funds to provide for his/her old age. In most cases, legislation binds people to use the proceeds of a retirement fund to purchase an. This document explains the various s that Momentum offers when retirement funds mature. 1. Cash lump sum at retirement A client has a right to a certain maximum cash lump sum at retirement. This amount is taxable at maturity. Options a. Retirement annuities and pension preservation funds The client can take a maximum of one third (after Momentum has deducted tax) in cash. If the maturity value is less than R22 5, the client may take the full lump-sum amount in cash. b. Provident preservation funds The client can choose to take the full lump sum at maturity (after Momentum has deducted tax). 2. Compulsory portion The client can invest compulsory money from any retirement fund, including retirement funds from other insurers or the client s employer, in any of our compulsory annuities. A compulsory annuity pays the annuitant a regular. Momentum offers two types of compulsory annuity products: a. Life annuities These are conventional annuities in which Momentum determines the amount of the payment and bears the investment and mortality risk. b. Living annuities Living annuities allow clients to structure their own underlying investments and choose their own levels of (within limits). The client can choose either of these two s, or choose a combination of the two. He/She may for example wish to put some of the retirement funds in a life annuity for stability and the rest in a living annuity for flexibility. Once a client has invested in a life annuity, he/she cannot withdraw the money or move it into a living annuity. However, one can change a living annuity into a life annuity at any stage. For example, one can buy a living annuity when interest rates are low and then, if interest rates increase, switch to a life annuity to receive a bigger, guaranteed. Life Annuities a. Single-life annuity The annuity pays a guaranteed for the rest of the annuitant s life, ceasing only on his/her death. The client can choose a guarantee term of between and 25 years. If the annuitant dies within the guaranteed term, the will continue to pay to beneficiaries until the end of the guarantee term.

3 b. Joint-life annuity A husband and wife can take out a joint-life annuity (it can be any relationship but will normally be a husband and wife). If one party dies, the annuity still pays out until the death of the other party. The annuitant can specify whether the must decrease by a fixed rate of between % and 5% when the first annuitant dies. The higher the decrease rate that a client chooses, the higher initial that he/she receives. The annuitant can choose a guarantee term of between and 25 years. If both annuitants die within the guarantee term, Momentum will continue to pay the to beneficiaries until the end of the guarantee term. c. Capital Protector The Capital Protector returns the client s capital on death. This is a packaged plan that consists of a life annuity and a life policy. The annuity provides a guaranteed for life and simultaneously funds the life policy. The cover under the life policy is equal to the purchase sum of the annuity and pays out at death of the annuitant. The client can choose a fixed or increasing rate of between % and 15% on the annuity. The premium growth rate on the life policy must correspond with the growth rate on the annuity. The client chooses a guarantee term on the life policy. Momentum may have to decrease the client s to supplement a shortfall in the life policy s premium when the guarantee term on the life policy expires. d. Joint-life Capital Protector A husband and wife can take out a Joint-life Capital Protector (it can be any relationship but will normally be a husband and wife). If one party dies, the still pays out until the death of the other party. The ceases at death of the second party (last survivor) and the cover under the life policy pays out. The client chooses a guarantee term on the life policy. Momentum may have to decrease the client s to supplement a shortfall in the life policy s premium when the guarantee term on the life policy expires. The client can choose one of the following s when choosing any of the above products: Income Income escalation rate Income increases annually by % to 15% Inflation linked Income increases annually by CPI or CPI plus maximum 5% Rate Protector Income increases annually by % to 15% plus *Rate Protector * Rate Protector: ly, one of the problems with a life annuity is that a client locks himself/herself into an interest rate for life. If he/she happened to retire at the bottom of the interest rate cycle, it means that he/she may miss out on the better annuity rates available at other times in the cycle. Momentum s Rate Protector is an al feature that allows Momentum to pay an increased if there has been an increase in the reference interest rate at the end of each of the first three policy anniversaries. The client may include the Rate Protector in any of the four life annuities that we have listed above. Note that you can only have level payments or fixed annual increases with the Rate Protector. The reference interest rate we use is the three-month Johannesburg interbank acceptance rate (the Jibar). For every,25% increase in the Jibar, the investor will receive an additional,625% of the original gross that he/she received in the first year of the investment. We do this comparison on each of the

4 first three policy anniversaries, ie the client s could potentially rise three times. If the Jibar has fallen compared with that on the inception date, we will not reduce the. The Rate Protector s is particularly attractive if you believe that interest rates will rise in the next three years. Living Annuities a. Retirement Income Option - RIO (Wealth platform) This product enables people to invest in a at range of investment vehicles to generate at: i. linked by making regular withdrawals from unit trusts, money market instruments etc ii. combination of a linked and conventional (life annuity) By investing in a diversified portfolio of investment instruments, RIO provides the potential for capital growth through exposure to the equity markets, while the investor receives a regular. A linked offers investors maximum flexibility in that they can choose the required level of. One can specify an level or any percentage of the investment account, provided that the specified annual is between 5% and 2% of the value of the investment at the contract anniversary. The investor can choose from (and switch between) a wide range of domestic unit trust funds, money market accounts, multimanager portfolios and offshore investment opportunities provided that the asset swap capacity is available. The investor benefits directly from the investment performance of the underlying investment instruments. The minimum investment amount is R5 with a minimum of R1 per fund (depending on the rules of the fund: some funds have their own rules). On the death of the memeber: i. If the origin of the RIO was a retirement annuity, beneficiaries may commute up to one third as a lump sum. If the beneficiary s annuity is less than R1 8 a year, he/she may commute the entire annuity. Beneficiaries must use the balance to purchase an. ii. If the origin of the RIO was a pension or provident fund, the beneficiaries may commute a portion or the total annuity as a lump sum or may continue to receive an annuity. They must effect commutations within six months of the death of the annuitant. b. Designer Annuity (Investo) This product enables clients to invest in any available Investo funds in Segments 3 to 6 to generate an. The investor benefits directly from the investment performance of the underlying funds. The client can specify an level or any percentage of the investment account, provided that the specified annual is between 5% and 2% of the value of the investment at the contract anniversary. The client can choose an annual increase at any growth rate between % and 2% a year. The minimum investment amount is R15 with a minimum of R2 per fund. The proceeds of an investment in a dollar denominated retirement fund must be converted into SA rands before investing these in an Investo Designer Annuity. On death of the member: See RIO above.

5 c. Personal Offshore Portfolio (POP) Designer Annuity (Investo) The client who chooses a Personal Offshore Portfolio Designer Annuity can invest in any global Investo funds in Segments 3 to 6 and may switch between these funds at any time. Only clients with investments in dollardenominated retirement funds may invest in the Personal Offshore Portfolio (POP) Designer Annuity. Investors may receive their in rands or dollars in an offshore bank account. Note: With regard to any of the above living annuities: The investment can be depleted if the client chooses the maximum and if the chosen investment vehicles do not perform as expected. (The LOA recommends that investors should consider an level of not more than 8%.) Momentum allows ad hoc contributions only if the client transfers the funds from the same type of retirement fund. We deduct sales and initial fees and invest the balance. The minimum investment amount is R5 with a minimum of R5 per fund. On death of the member: See RIO above.

6 Guideline when choosing a compulsory annuity Single Life - suitable for single people. No to partner on death of annuitant Joint Life - suitable for married people (partners) Income to partner on death of annuitant Capital Protector - people who want to leave money to dependants at death Living Annuity - people who want to structure their own investments Fixed : people who need a higher initial, though no annual increase Income escalation: people who prefer lower initial, though increases annually Fixed vs increases: See single-life traditional Income decreases on death of first annuitant: People who will cope with smaller when a partner dies (higher initial to both) No decrease on death: Lower initial Single life (1 annuitant) Income s: Fixed or increasing Ceases on death Capital: Purchase sum pays out to beneficiaries on death of annuitant RIO (Wealth) Income s: Linked to performance of investment vehicles, or Combination of guaranteed and linked Flexible: Choose level between 5% and 2% Capital: Small : Capital left at death Large : Capital erodes Inflationlinked Income increases with CPI: people who need increases that correlate with CPI rates Income increases with CPI plus (max 5%): people who need to increase by more than CPI rate. The higher the annual increase rate chosen, the smaller the initial Inflationlinked CPI vs CPI plus: See single-life inflation-linked Decrease on death vs no decrease: See joint-life traditional Joint life (2 annuitants) Income s: Fixed or increasing Continues paying to 2nd annuitant on death of 1st Ceases on death of last survivor Capital: Purchase sum pays out to beneficiaries on death of last survivor Designer (Investo funds Segments 3 to 6) Income s: Linked to performance of chosen Investo funds Flexible: Choose level between 5% and 2% Capital: Small : Capital left at death Large : Capital erodes Rate Protector Rate Protector: people who believe interest rates will rise in the next 3 years No Rate Protector: higher initial, however, no benefit when interest rates rise Rate Protector Rate Protector vs no Rate Protector: See single-life Rate Protector Decrease on death vs no decrease: See joint-life traditional POP Designer (Global Investo fund, Segments 3 to 6) Income s: R75 offshore allowance Linked to performance of chosen global Investo funds Income in rands or dollars Capital: See Designer above Single vs Joint: Consider single-life annuity if no partner or if partner has adequate sources on death of annuitant: Single life = higher. Guarantee term on single and joint-life annuities: No guarantee term = slightly higher. However, all capital is lost on death if the client did not choose guarantee term. Guarantee term on life policy on Capital Protector: Momentum may decrease the client s when the guarantee term on the life policy expires to supplement a shortfall in the life policy s premium (if necessary). Increasing : Ideally everyone should choose an increasing to keep in step with inflation. Choosing a fixed though = higher initial. Living annuity: People should realise the effect of market exposure: Investment may perform well when markets boom, though wear away when markets are down.

7 2.4 Investment illustration The following are examples of capital and amounts when a client invests in a Momentum annuity. This example refers to a male annuitant who purchases a compulsory annuity for R5 at age 6. Note that annuity rates change on a weekly basis and the rates illustrated below may differ totally from week to week. Single-life annuity (1-year guarantee term, % annual growth) Inflation linked (increases annually with CPI) Rate Protector Joint-life annuity (1-year guarantee term, % annual growth, no reduction on death of first annuitant)) Inflation linked Rate Protector Income R4 561 R2 542 R4 212 Income R4 53 R2 91 R3 743 Remaining capital (on death after guarantee term) Remaining capital (on death both annuitants after guar. term) Capital Protector (no guarantee term, % annual growth) Income Remaining capital (on death) Inflation linked Rate Protector R3 557 R1 734 R3 234 R5 R5 R5 Joint-life Capital Protector (no guarantee term, % annual growth) Income Remaining capital (on death) Inflation linked Rate Protector Retirement Income Option (RIO) ( of 1% of investment account, Money Markets) Age 6 Age 7 Age 8 R3 587 R1 649 R3 295 Income* low R3 759 R2 483 R1 447 R5 R5 R5 Remaining capital (* low) R R R Designer Annuity ( of 1% of investment account, SA Money Market) Income* low Remaining capital (* low) Age 6 Age 7 Age 8 R4 72 R2 37 R1 38 R484 6 R282 R164 2 POP Designer Annuity ( of 1% of investment account, global bonds) Income* low Remaining capital (* low) Age 6 Age 7 Age 8 $512,89 $298,5 $173,73 $61 $35 5 $2 7 * Low: Momentum usually projects values at a high (1%) and a low (5%) inflation rate to give an indication of the that the client can expect (illustrative values). We illustrate the lower rate in this example.

8 Taxable The full is taxable in the client s hands. Momentum will deduct tax according to the standard tax tables and pay this to SARS every month. Sales fees a. Life annuity Upfont: Maximum of 1,5% of the investment vlaue b. Investo Designer Annuity Upfront: Between % and 1,5% of the investment amount Trail: Between % and 1% a year, paid monthly on the value of the investment Trail Pop Designer: Between % and,5% a year The total commission may not exceed 6,5% in the first five years on a Designer Annuity and 1,5% on a POP Designer Annuity c. Wealth RIO The financial adviser can choose upfront commission, trail commission or a combination of the two. Upfront: Maximum of 1,5% of the investment value Trail: Maximum of 1,% a year on the value of the investment The total fee may not exceed 6,5% in the first five years 3. Enhancer Benefit What is the Momentum Enhancer Benefit? The Momentum Enhancer Benefit offers investors an attractive alternative to invest lump-sum amounts that they receive from their retirement provision. In addition, it offers investors flexibility, accessibility and liquidity within a single investment without the limitations that would apply to new investments in long-term insurance policies. How does it work? When an investor becomes a member of and invests money in a Momentum retirement fund, the fund will automatically invest the member s investment in an endowment policy. In the time leading up to retirement, this policy will build up a value equal to the full value (3/3) of the member s retirement benefit. At retirement the investor must purchase a compulsory annuity with at least 2/3 of the maturity value and may take the remaining amount, up to 1/3 of the full retirement benefit, in cash. Members who have invested in the retirement fund for at least five years when they retire and who choose to take one third of their retirement benefits in cash will have the to take ownership of the policy that the fund used to provide the member s retirement benefit. Investors may reinvest the 1/3 cash lump sum in this policy. Benefits of the Enhancer Benefit policy An immediate benefit for investors is that Momentum does not charge anything for the Enhancer Benefit. Investors therefore enjoy enhanced market participation because a higher percentage of their lump sum is allocated to investment than when a client takes out a new endowment policy. Because the policy, which was originally taken out by the retirement fund to fund the investor s retirement benefits from the fund, has been in existence for at least five years, the investor may treat the policy as a matured endowment and enjoy the benefits associated with such policies. Investors may make additional ad hoc payments to the Momentum Enhancer Benefit policy as loan debt repayments up to a prescribed maximum. This feature is ideal for investors who have staggered their retirement and have additional lump-sum monies to

9 invest. In addition the investor may take voluntary withdrawals from the Momentum Enhancer Benefit policy when the need arises. The Momentum Enhancer Benefit is the ideal investment solution for investors who want to benefit from a matured investment policy at retirement, a period of time that is associated with the need to gain immediate access to a comprehensive range of investment funds in the most tax-effective manner possible. The investor may invest additional ad hoc amounts in the policy as loan debt repayments and may also take voluntary withdrawals from the policy when the need arises. 4. Open-ending Under the Income Tax Act, retirement has to take place between ages 55 and 7. If a policy matures before the client s 7th birthday and he/she does not yet want to retire, the client can open-end the full maturity value (3/3 amount) in the Investo range to attract further growth until age 7. The client must open-end the full maturity amount (three thirds), ie he/she cannot partly retire. We allow no partial withdrawals or loans from retirement annuities. We allow one partial or full withdrawal from preservation funds. Sales fees on open-ending In terms of legislation, the client generally pays no commission/advice fees when open-ending a retirement fund. Irrespective of how many intermediaries render services in relation to a retirement fund, the remuneration must be in line with the general rules of a retirement fund and may not exceed the maximum commission in terms of the regulations of the Long-term Insurance Act of Regulated commission is payable on further premium contributions. (See benefits of an open-ended policy in the brochure on open-ending of endowment policies.) 5. Maturity process (documentation) Clients who invested their retirement funds in marketrelated portfolios (excluding structured products) have the to stabilise their policies before the maturity date. Momentum will notify clients of their stabilisation five months before maturity. The client must complete and return a form that indicates his/her choice with regard to stabilisation of the policy. Momentum will automatically stabilise the policy if we don t hear from the client three months before the maturity date. Clients will receive a maturity letter three months before the maturity date. They must take the following steps after receiving the maturity letter: The financial adviser contacts Momentum call centre ( ) to indicate which retirement the client wants to exercise. The call centre agent completes a pre-filled form (provisional quotation) according to the information that the financial adviser supplies and sends it to the financial adviser. The client signs (and adjusts if necessary) the form and returns it to Momentum. The client must include a copy of his/her ID document. The client must include a copy of his/her bank statement or a cancelled cheque. If we do not receive any instructions, or if there are any outstanding requirements on the maturity date, we will automatically open-end the policy in the Deferred Maturity Portfolio.