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Retirement Planning
Friday, October 30, 2015 - 02:16
Potential benefits

Group retirement annuities (RAs) are an ideal solution for small and medium-sized business owners looking for a retirement savings solution for their staff, and present opportunities for IFAs looking to build long-term relationships with potential clients.
“The great thing about an efficient Group RA system is that it requires very little oversight and intervention from the business owner. In essence, a Group RA allows an employer to easily manage individually owned RAs of their employees on a group-wide basis,” says Jeanette Marais, director of distribution and client service at Allan Gray. “This enables the business owner to provide their employees with a tax-efficient savings solution that empowers them to make provision for their retirement. The advantage is that the business owners don’t have to incur any liabilities or worry about the administration of their employees’ retirement portfolios. Instead, they can remain focused on their core competency, which is running their own businesses.”
It is of course important for advisers to explain to business owners the key differences between modern and traditional retirement savings products.
Modern RAs have several benefits over their old-school alternatives: Employees can choose underlying unit trusts to suit their needs and risk profile (within legal limits), which means they have control over their potential investment return. They can switch between unit trusts at no additional costs when and if their needs change. In traditional pension or provident funds, on the other hand, contributions are deducted from employees’ pre-tax salary and employees often have little control over their investment.
In addition, in traditional arrangements, when an employee leaves their employer, their membership of the fund ends. This contrasts to an RA, which is portable. As the RA is in the name of the employee rather than the employer, workers can continue contributing to their investment if they change jobs.
“Unit trust-based RAs provide employees with a greater sense of ownership of their retirement savings compared to the traditional model of simply outsourcing that responsibility to the employer,” says Marais. “This provides individuals with more control over their retirement savings.”
Another important difference between RAs and pension or provident funds is around access to the investment. RA members cannot access their money until they retire (except under exceptional circumstances), and when they retire they can only take up to one-third in cash; the rest must be used to purchase an income-providing product, such as a living annuity or guaranteed life annuity. This is the same for pension funds, but provident funds allow members to take the full benefit as cash. In addition, in traditional retirement funds, members are allowed a single withdrawal when they leave their employer; in an RA members are not allowed to access their money – which can be hard at a time when they could do with the cash.
“RAs are structured to enforce preservation,” Marais says, noting that they also provide for an easy transition into a living annuity or a guaranteed life annuity at retirement.
Ownership responsibility may encourage employees to become more engaged with their savings in general.
“For many individuals RA membership will be their first introduction to the world of investing, and, seeing the benefits, many will go on to make additional discretionary investments,” she says, adding that each individual RA member is a potential long-term client as they could look to you for advice right through to their retirement.
There are ways to manage the burden for IFAs who may be put off by the scale of the administration involved when dealing with a large intake of Group RA clients, which would necessitate advising on many individual portfolios. Some platforms, such as Allan Gray’s, enable IFAs to use model portfolios that group similar clients into defined strategies.
“Instead of worrying about each client's portfolio, you worry about the grouping and about the model for each grouping,” says Marais. “This means you manage portfolios rather than individual fund allocations, which makes managing corporates that much easier.”
 

Copyright © Insurance Times and Investments® Vol:28.10 1st October, 2015
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