momentum singleand joint-life annuities

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1 momentum singleand joint-life annuities technical investment guide wealth

2 Annuities create financial wellness by protecting your income against market fluctuations and making sure that you have an income for as long as you need it. Our wide range of annuities can satisfy any income need you may have.

3 Our traditional annuity range gives you peace of mind that you will have an income for as long as you need it. They take the guesswork out of investing for an income and you can rest assured that market fluctuations will not affect the income we pay you. In this document we deal with one type of traditional annuity, called a life annuity. A life annuity pays you a guaranteed income for life in return for a lump-sum investment. You should consider a life annuity if you: need a guaranteed regular income, want to make sure you do not outlive your savings, do not want the stress of making ongoing investment decisions that put your income at risk, want an income that never reduces, and/or are healthy. You should discuss other investment options with your financial adviser if you: must retire from your pension or provident fund but do not need an income straightaway, want to make investment decisions about how to invest for an income and are prepared to take the risk that goes with this, do not need a guaranteed income for life, want the flexibility to change the income you get on an annual basis, and/or are in poor health and do not expect to enjoy a long retirement. What are the benefits of investing? Guaranteed income for life You cannot outlive your income because we guarantee that we will pay you an income for as long as you live. You can also make sure that a minimum amount of income payments are made in the event of you dying early by choosing a minimum term for which income must be paid. Your income will not reduce The income we agree to pay you at the start of the investment will not reduce (unless you choose a reduction) and you can choose to have this income increased yearly. Takes the guesswork out of investing for an income You dont have to decide which assets you must invest in to produce an income that will last for as long as you live. You also do not have to worry that market fluctuations may affect your income. Your income is guaranteed and will never reduce for as long as you live. Increasing investment charges will not affect the income we pay you in the future We calculate the total cost of your annuity at the start of the investment. This cost is taken into account when we calculate the income we will pay you for the rest of your life. This means that your income cannot decrease because of increasing investment charges. wealth single- and joint-life annuities technical investment guide 2014 Page 3 of 12

4 The rest of the document will explain: Options available on life annuities What risks there are when you invest How do you invest Answers to questions you may have about this investment Summary of rules Options available on life annuities This section provides an overview of the options available on life annuities. Important: The options you choose will affect the income we pay you. You cannot change the type of annuity, income structure, timing of the income or guarantee term after the investment is placed with us. Therefore, it is very important to carefully consider the options available to you when you invest. Please discuss this with your financial adviser. Annuity type You can choose between a single-life annuity and joint-life annuity Single-life annuity Joint-life annuity You are the only life insured. We will pay you an income for as long as you live. The income will stop when you die. A joint life annuity allows you to add a second life insured, e.g. your spouse. The second life insured will continue to receive the income when the first insured life dies. Further on in the guide we discuss income reduction options when one of the insured lives dies. Income structure Guarantee income payment term A guarantee term makes sure that a minimum number of income payments are made from your investment. You may choose a guarantee term between five-25 years, depending on your age at your next birthday at the start of the investment. If you choose a guarantee term on a single-life annuity, the income will be paid for: your lifetime, or until the end of the guarantee term whichever is the longest. If you die before the guarantee term is over, we will pay your income to the beneficiaries you nominated. If you choose a guarantee term on a joint-life option, the income will be paid for: your lifetime, the second life insured s lifetime, or the chosen guarantee term, whichever is the longest. If both insured lives die before the guarantee term is over, we will pay your income to the beneficiaries nominated. Page 4 of 12 wealth single- and joint-life annuities technical investment guide 2014

5 Income reduction option on joint-life annuities You can choose to have the income reduced when one of the insured lives dies. This option lowers the cost of a joint life annuity and allows a higher income to be paid to the insured life who first receives the income. We allow up to 50% reduction. You should discuss this with your financial adviser. You can also choose to have the income reduced with a different percentage for each of the insured lives. For example: Husband (first life insured) and wife (second life insured) are the insured lives on the investment. You can choose for the income to lower by 50% if the husband dies first but if the wife dies first, you can choose for the income to lower by 25%. If you chose a guarantee term, the full income will be paid until the end of the guarantee term. The income will only be lowered after the guarantee term. Income increases You can choose a level income or an income that increases every year. The following four options are available: 1. Level income (no increase) Your income payments will not increase over your lifetime. This option pays a higher initial income than an income that increases. However, as the prices of goods and services increase over time (inflation), you will find that your level income will buy fewer goods and services every year. 2. Fixed percentage increase You can choose to increase your income every year by up to 15%. An income that increases by a fixed percentage every year will give you a lower initial income than a level income. However, your income will have a better chance of keeping up with inflation, thus lowering the need for you to lower your expenses in the future. Keep in mind that the percentage you choose your income to increase with might be lower or higher than the increases in inflation. Therefore, there is still a risk that your income might not increase enough to keep up with the increase in prices of goods and services (inflation). You should consider a fixed percentage increase if: you are willing to accept a lower initial income compared to the level income annuity (or if you are able to pay more for the same initial income), or you want some protection against inflation, but are comfortable that the increase may be greater or less than inflation each year and over time. Here is an example of how your income, when linked to a fixed percentage increase, will increase: Let us assume that your initial income is R1000 with an annual income increase of 5%. In year two your income will increase to R1050 and in year 3 your income will increase to R R You should consider a level income if you: need a higher initial income than available under the increasing annuity options, are more concerned about your income needs in early years, and do not expect to rely only on this income in later years, are less concerned about the need to reduce your expenditure in future years, e.g. if you have or expect to have another source of income available to help cover your living expenses, or plan to increase your income yourself, e.g. by buying a second annuity in future. R1050 R1000 Year 1 Year 2 Year 2: R (5% X R1000) = R1050 Year 3: R (5% X R1050) = R Year 3 wealth single- and joint-life annuities technical investment guide 2014 Page 5 of 12

6 3. Inflation linked increase You can choose to increase your income every year by the same percentage as inflation. The initial income on an inflation linked annuity will be lower than that from a level annuity. It may also be less than the income you will receive on an annuity that increases by a fixed percentage, depending on the increase you choose. You should consider an inflation linked annuity if: You are willing to accept a lower initial income than a level income or are able to pay more to get the same initial income, You want to protect your income against the effects of inflation i.e. you want to be able to buy the same amount of goods and services in future years, as you do today, or You do not have access to another income and therefore you need to make sure that you can maintain your living standard on this income. Here is an example of how your income, when linked to inflation, will increase: Let us assume that your initial income is R1000 and the published CPI figure is 5% in year one and 3% in year two. R1000 would increase to R1050 in year two and R in year three. R R1050 R1000 Year 1 Year 2 Year 3 Year 2: R (5% X R1000) = R1050 Year 3: R (3% X R1050) = R Annual CPI Inflation Rate at 31 August 2013 The inflation number (CPI) is an average percentage of the increase in prices of goods and services. The prices of goods and services you normally buy may be higher or lower than the average CPI figure (as illustrated by the chart on the left). Source: Stats SA Page 6 of 12 wealth single- and joint-life annuities technical investment guide 2014

7 4. Inflation plus a fixed percentage increase You can choose to increase your income every year by inflation plus a chosen fixed percentage, e.g. CPI + 3%. You should consider an income that increases by inflation plus a fixed percentage if: You are able to accept a lower initial income or able to pay more for the same initial income as available from level and inflation linked annuities, You want the highest inflation protection available for your income, You know that the prices of the goods and services you use increase by more than the official inflation number, You are in good health and expect to enjoy a long retirement. Here is an example of how your income, when linked to inflation, will increase: Let us assume that your initial income is R1000 and you chose for your income to increase with CPI +3% every year. Inflation is 5% in year one and 3% in year two. R1000 would increase to R1080 in the second year and to R in the third year. R R1080 R1000 Year 1 Year 2 Year 3 Year 2: R (8% X R1000) = R1080 Year 3: R (6% X R1080) = R As mentioned above, the different increase options will affect the initial income paid to you as well as your income in future years. The graph below explains this (this graph is purely an illustration): Annual Income Age No increase 3% increase 5% increase For a given investment amount, a higher increase percentage means that you will receive a lower income in early years but more in the future. wealth single- and joint-life annuities technical investment guide 2014 Page 7 of 12

8 Income payment frequency You can choose how often you want your income to be paid, e.g.: annually (every year), bi-annually (every six months), quarterly (every three months), or monthly. You can also choose if you want the income to be paid at the beginning [in-advance] or the end [in-arrears] of the payment frequency mentioned above. Important: If you are investing using compulsory money, income payments in arrears can only be paid monthly. What are the risks of investing in a life annuity? Annuities are designed to return your initial investment plus interest (less expenses) in the form of income payments to you over your average expected lifetime. The main risk of a life annuity is that if you die sooner than expected, your full investment amount is not returned to you in the form of income payments. This risk can be managed by using a guaranteed income payment term or a joint-life option. On the other hand, you benefit if you live longer than expected because you will receive more than the investment amount back. How do I invest in a life annuity? Please contact your financial adviser who will help you choose the options for your life annuity that will best meet your financial needs. Your financial adviser will give you an annuity fee and benefit proposal (quote) that will show an income that was calculated based on your choice of annuity type, guarantee term, income structure and income frequency. The minimum investment amount is R50 000, unless the investment amount is coming from a Momentum Retirement Fund. You cannot change the type of annuity, income structure, payment frequency or guarantee term after the investment is placed. Therefore, it is very important to carefully consider the options available to you at the time you invest. Page 8 of 12 wealth single- and joint-life wealth annuities technial guide technical traditional investment life annuity guide 2014

9 Answers to questions you may have about this investment What funds can you use to invest in a life annuity? You can invest both voluntary and compulsory money. What is compulsory money? Money received from a retirement fund is seen as compulsory money. If you invest money from a retirement fund in an annuity, it will be classified as a compulsory life annuity. What is voluntary money? All other savings are seen as voluntary money. A voluntary annuity is an annuity of choice, where you invest a lumpsum amount from any source (other than a retirement fund) and from which a regular income is drawn. Who are the different people involved with the investment and what roles do they play? Life insured The lives insured determine until when the income is paid. For example: if you have one life insured, the income payment will stop when he/she dies. If you have two lives insured, the income payments will stop when they both die. Annuitant This is the person who receives the income. Beneficiary of proceeds This person(s) will receive the income for the remainder of the guarantee income term, if applicable. Cool-off period You may cancel your annuity by informing Momentum in writing during the 30-day cool-off period. Your cooloff value may be equal to or less than the amount you originally invested depending on the movement in annuity rates set by Momentum every week. In addition, Momentum will also deduct any income benefits already paid from the cool-off value. All commission expenses and fees will be refunded. If you die during the cool-off period, your estate cannot cancel your annuity. What fees will I pay? The fees and charges for a life annuity are already taken into account in the annuity rate used to exchange a cash lump-sum into an income. The details of the fees and charges (including commission) will be shown on your annuity fee and benefit proposal (quote) prepared for you by your financial adviser. This investment can allow a commission charge lower than the maximum commission rate prescribed by legislation. You will need to negotiate the commission charge for your life annuity directly with your financial adviser. How will my income be taxed? If you invest in a compulsory annuity as an individual, the income is fully taxable at your marginal tax rate. If you invest in a voluntary annuity as an individual and you qualify for Section 10A of the Income Tax Act, you will not be taxed on the capital component of the income. However, the interest component is taxed at your marginal tax rate. The taxable amount will be shown on the annuity fee and benefit proposal (quote) prepared for you by your financial adviser. We will take into account all income you receive from Momentum when we calculate the marginal tax rate we must use to tax your income. Any other sources of income outside of Momentum will be excluded from the tax calculation and you will need to declare those separately. How is inflation calculated? Inflation linked increases use the Consumer Price Index(CPI) as published by Statistics South Africa. The CPI figure they publish has a four month lag. The yearly CPI figure we use is the one available on the increase date, which is the inflation rate for the year ending four months before. wealth single- and joint-life annuities technical investment guide 2014 Page 9 of 12

10 Summary of rules Voluntary/Compulsory Income is paid for Investment term Both available Lifetime or guarantee period, whichever is the longest Life Guarantee income term 5 to 25 years 1 Single-/Joint-Life Both available Increase options Fixed 0% increase Fixed percentage Up to 15% CPI Linked Yes CPI + percentage CPI + up to 5% Allowable increments 0.01% Increase date CPI Lag Payment frequency Policy anniversary 4 months Monthly, quarterly, bi-annually, annually Arrears/Advance Both 2 Minimum investment Minimum ANB (age next birthday) at entry 15 Maximum ANB (age next birthday) at entry 75 4 Maximum age at end of guarantee term 95 Minimum monthly income Minimum annual income Surrenders Loans What happens when you die? R100 R1200 No No Income payment stops or continues until the end of the guarantee term, if applicable Maximum reduction on joint-life 50% Alterations Backdating Cooling-off Underwriting Validity period and payment date Rates No No Yes No Your lumpsum investment must show in our bank account on the same day as specified on fee and benefit proposal (quote). If it is not paid in the same week as when the fee and benefit proposal (quote) was drawn, the fee and benefit proposal (quote) will not be accepted. Our rates change every Monday and the fee and benefit proposal (quote) must be done on our latest fee and benefit proposal (quote) version. Notes: 1 Guarantee income terms available depend on age next birthday at the start of the investment. 2 You can only choose arrears on a compulsory annuity if your payment frequency is monthly. 3 We will accept lower investment amounts if the amount comes from a Momentum Retirement Fund. 4 Exceptions may be considered. Please ask your financial adviser to request a special quote. Page 10 of 12 wealth single- and joint-life annuities technical investment guide 2014

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12 Disclaimer: The information contained in this brochure is based on Momentum s interpretation of South African legislation at the time of printing this brochure. It is published for general information purposes only and should not be relied on as financial advice specific to the reader s financial needs and objectives. While every effort has been made to ensure the accuracy of information published in this brochure, Momentum does not warrant its accuracy and takes no responsibility for any loss or damage of any nature whatsoever that may be attributable, directly or indirectly, to reliance on this information. MMI Group Limited 268 West Avenue Centurion 0157 PO Box 7400 Centurion 0046 South Africa Tel +27 (0) Fax+27 (0) Share Call wealthservice@momentum.co.za Reg. No. 1904/002186/06. Momentum, a division of MMI Group Limited, an authorised financial services and credit provider.