Bad business

Bad business

Living annuities have received a lot of press in the past while and much of it has been critical of the product (sometimes rightly so). The issue has mostly been around the erosion of income because of poor fund selection and an income draw that is too high and thus not sustainable. This has resulted in ASISA producing a revised code for Living Annuities that was introduced in Sep 2010. The intention is noble but in my opinion, the added “disclosure” is far from clear and it could have been done in a more user-friendly manner that the average man-in-the street could understand.

But that is not the point of this post – the other kind of annuity at retirement is a life annuity – typically this is sold through an insurance company. You give them your capital and based on a few things like your mortality (age & sex) as well as interest rates, they contract to pay you an income for the rest of your life (at death the capital usually disappears – but that is not the issue here).

According to stats*, 90% of these annuities have no annual escalation on the income! This means that if you take one of these and live for 30 years, you will still be drawing the same income in 30 years time! At an inflation rate of 6% per annum an initial income of R1000 will effectively have reduced to R156 pm at that stage. Talk about erosion of income and yet nothing has been done about this by ASISA – they seem to be turning a blind eye to what is an exceptionally bad business practise and one that should have been outlawed years ago. If living annuities are subject to a code of conduct then life annuities should also be subject to one. And the first point should make it compulsory for Life annuities to have inflation linked increases on them. I cant think of any valid reason for not including one. The only possible reason is that if there is an escalation then the initial income will be lower and at “quote stage” this might not look as attractive to the client resulting in a “lost sale” and so the escalation is left off to make it more appealing (initially that is).

I have come across far too many “little old ladies” who are locked into these annuities and are still receiving the same income that they started with – they have not been “protected” against loss of income by anyone!