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Comparing five annuity options offered at retirement in South Africa

Bester, Tian (2016-03)

Thesis (MComm)—Stellenbosch University, 2016.


ENGLISH ABSTRACT: South African citizens are faced with many financial decisions when they reach retirement. One such decision is which annuity to purchase with their pension capital. This study therefore analyses five different annuities available to the South African public in order to provide a better understanding of the value these products offer. The main focus of the analysis was the comparison of present values and ruin probabilities. The annuities examined were living and guaranteed annuities. Four different types of guaranteed annuities were analysed: level, 5% escalating, inflation-linked, and The Complete Picture Pension (TCPP) annuity offered by Sanlam. Eight retiree scenarios were considered with half of these scenarios focusing on spousal couples. An important conclusion to be drawn from the study is that living annuities are retirement products for those who can ‘afford’ it and who have sufficient financial knowledge. It is recommended that these products only be used as an additional source of income on top of a guaranteed annuity or some other form of income. This study also shows the significant value of guaranteed annuities when an increase in life expectancy is assumed. Furthermore, the industry should research new product structures such as the TCPP annuity, which is a relatively new product, and which shows promising results in this study. Finally, the study emphasises the subjectivity of the annuity decision as the results depend on the retiree(s) circumstances and needs to a large extent.

AFRIKAANSE OPSOMMING: Suid-Afrikaners word met menigte finansiële besluite gekonfronteer wanneer hulle aftree-ouderdom bereik. Een van daardie besluite is watter annuiteït aangekoop moet word met hulle pensioengeld. Hierdie studie ontleed dus vyf verskillende Suid-Afrikaanse annuiteïte wat tans beskikbaar is vir die Suid-Afrikaanse publiek. Die ontleding is gedoen met behulp van netto teenswoordige waarde berekeninge en sogenaamde ruin waarskynlikhede. Die studie ontleed lewende en gewaarborgde annuïteite. Vier verskillende gewaarborgde annuïteite word ontleed: geen verhoging, 5% verhoging, inflasie-gekoppel en The Complete Picture Pension (TCPP) annuïteit wat deur Sanlam aangebied word. Agt verskillende aftree-scenarios word in ag geneem. Vier uit die agt scenarios fokus op getroude pare en die ander vier op enkellopendes. ‘n Belangrike gevolgtrekking wat uit die studie gemaak word is dat lewende annuïteite gepas is vir diegene wat dit wel kan ‘bekostig’ en wat die nodige finansiële kennis het. Dit word aanbeveel dat hierdie produkte slegs as ‘n addisionele bron van inkomste gesien moet word en dat ‘n persoon se primêre inkomste eerder uit ‘n ander bron (gewaarborgde annuïteit of ander inkomste) moet kom. Die studie dui ook op die waarde wat gewaarborgde annuïteite inhou indien ‘n toename in lewensverwagting aanvaar word. Dit word verder aanbeveel dat die industrie nuwe produkte moet ontwikkel, soos die TCPP annuïteit, aangesien hierdie annuïteit belowende resultate toon. Laastens dui die studie ook op die subjektiwiteit van die annuïteit-besluit aangesien die resultate grootliks afhanklik is van die afgetredene(s) se persoonlike omstandighede.

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