Help retirement fund members to make the right choices at retirement

By Janice Roberts
Rajen Naidoo, Head of Income and Structured Solutions at Momentum Corporate

By: Rajen Naidoo, Head of Income and Structured Solutions at Momentum Corporate

Members of retirement funds make many important financial decisions during their working life-time. Choosing the right annuity as they near retirement is one of the most critical decisions. This decision, which involves using their hard-earned retirement savings to purchase an income for retirement, can have a major impact on their quality of life once retired. 

One of the challenges financial advisers specialising in employee benefits often face is providing personalised advice to all members, especially when the workforce is large. Members’ general apathy around their benefits and poor financial literacy add to this challenge. To help address this, financial advisers should consider partnering with a forward-thinking umbrella retirement fund.

The right partner

Your chosen retirement fund partner should comply fully with the default retirement fund regulations, which includes a requirement for retirement funds to have a default annuity strategy. It’s important to make sure that the fund’s default annuity strategy has been carefully developed taking the various annuity options available into account, as well as the fund’s membership profile and members’ needs.

Members are not automatically placed into the default annuity. They still need to “opt-in” at retirement, or choose another annuity that might be more suitable for their personal circumstances. Professional financial advice to guide this process is critical.

The fund should also offer multi-channel benefit counselling, which equips members with a basic knowledge of financial concepts and assists them to understand their employee benefits. Effective benefit counselling improves financial literacy and lays a foundation for understanding benefits. Partnering with a fund that prioritises financial education allows you to build on an already-established financial foundation with personalised financial advice.

Important factors to consider when guiding members in their annuity choice

  • Will the initial monthly income cover the individual and their household’s basic needs?
  • Does the annuity guarantee an income for life?
  • How is the annuity income protected from inflation?
  • What options are there to make sure loved ones are covered should the member die?
  • How can the member avoid running out of money during retirement?

With-profit annuities and living annuities are two popular types of annuities.

A living annuity pays a regular retirement income based on the returns of a market-linked investment portfolio, chosen by the member. However the income is not guaranteed.  This means that if the level of income the member chooses to draw is consistently higher than the portfolio investment returns, the money in the living annuity may run out during retirement.

The monthly retirement income paid from a with-profit annuity is guaranteed for life. Annual increases are granted based on the performance of the with-profit annuity investment portfolios. These increases help to maintain the purchasing power of the pension. Every time the pension increases, the new amount is guaranteed for life. Members who opt for a with-profit annuity need to understand that they are unable to change to another type of annuity later on.

Visit the official COVID-19 government website to stay informed: