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With-profit life annuity increases comfortably beat inflation

 

With the cost of living continually escalating, the ability to secure inflation-beating annual increases on your retirement income is a recurring challenge, especially in a volatile, low-return investment environment.

Retirement income specialist, Just, has announced 2021 with-profit annuity increases that comfortably beat inflation, benefitting pensioners with a much-needed boost to their retirement income.

The StatsSA average year-on-year inflation over the last 12 months is 3.4%, and Just’s with-profit annuity provides its pensioners with an increase of between 4% and 8% in 2021, depending on the product selection.

Since its launch in 2015, Just has focused on enhancing the features, transparency and performance of with-profit annuities in South Africa for the benefit of pensioners and advisers. With-profit life annuities offer retirees an income for life, which will never reduce regardless of what happens to investment markets or how long a retiree lives. An underlying investment component drives the annual increase, and it can be boosted by how astutely an insurer manages its product.

“Usually when a pensioner buys an annuity, they expect to earn some investment return and then pay a charge to an insurer for longevity insurance and product management,” says Just CEO Deane Moore. “However, over the past 5 years, Just has effectively paid its own charges for longevity insurance and product management, and added around a further 8% in value to clients. This is unique, where an insurer adds net value to asset performance rather than simply levying a charge against it.”

This table shows the increases to pensioners on the Just Lifetime Income StableGro product, which is expected to track inflation when investment returns are CPI + 6% after investment management fees. The product has beaten inflation through the value-added product management of Just, even though investment performance has been significantly less than expected.

Increase Year

CPI1

Actual Increase, after all fees

(A)

Investment performance, after guaranteed interest rate and investment management fees

(B)

Just value add, after product management fees

(A) – (B)

2017

6.3%

4.1%

5.2%

(1.1)%

2018

5.3%

5.0%

5.6%

(0.6)%

2019

4.6%

6.1%

3.8%

2.3%

2020

4.1%

5.4%

3.1%

2.3%

2021

3.4%

5.5%

1.6%

3.9%

Cumulative since inception

26%

29%

21%

8%

1. Stats SA average year on year Consumer Price Inflation over 12 months.

Source: Just SA


According to Moore, in recent times, retirement fund trustees and individual clients have focused on reducing fees to improve long term value. While admirable, he says it is even more important to focus on the value add after taking account of all fees, which should be disclosed transparently.

“With-profit annuities offer peace of mind through their lifetime income guarantees, combined with increases linked to investment market performance. They are available both as standalone life annuities or as portfolio choices within a living annuity. We believe they are useful as a foundational building block in the retirement portfolio of every retiree,” says Moore.