Some products should be banned!
I met with a new client recently who came to see me because she has 2 RA’s that mature this month. She does not want to take income from them at this stage and certainly does not want to continue them with the company concerned. Who can blame her, the annual compound return on one of them is around 5% per annum since 1983. But that is not the issue here (I will deal with that in a later post).
What really irks me is that when she presented me the documents that she had received from the insurance company I noticed that they included a quote for a life annuity, without any escalation on it! Who (with any sense of morality) offers a 55 year old a non-escalating life annuity? There is surely only one reason that the company would do this and that is because they are trying to hide their poor annuity rates and the fact that the initial income would look really poor if it had an escalation on it.
National Treasury seems to have a lot to say about annuities and in particular they are very critical of living annuities but surely, if they are serious about improving the annuity market, they should ban non-escalating annuities! In fact, if insurance companies were more honest, they would refer to this kind of annuity as a decreasing annuity as your income is effectively decreasing by inflation each year. In the above instance, if inflation is 6% per annum then by the time she turns 75, her income would be equivalent to 30% of the current income and at 80 it would be around 22% of the current income.
So how about it, if Treasury and the insurance industry insist on keeping these kinds of annuities, perhaps we should push for them to be re-named as “decreasing life annuities”. Somehow I don’t think there would be a market and if they won’t ban these products then at least lack of demand would ultimately result in their demise!