The Old Mutual SuperFund stands as a leading umbrella fund solution in South Africa, offering its members significant advantages for retirement savings and additional benefits. Whether you’re directly employed by Old Mutual or connected through a third-party employer, the time may come for retirement or a career transition. In these pivotal moments, the Old Mutual SuperFund offers the flexibility needed to navigate your options. It’s crucial to understand the available paths—whether retiring or changing jobs—to effectively manage your retirement benefits and make informed decisions for your financial future.
Retirement marks a significant milestone in your life, and the Old Mutual SuperFund is designed to support members in transitioning smoothly into this new phase. Upon reaching retirement, you have several options to consider:
Lump-Sum Withdrawal: Members can choose to withdraw a portion of their savings as a lump sum (up to 1/3), which can be used to settle debts, invest in other ventures, or fund retirement activities. It’s important to consider the tax implications of this choice, as well as the long-term sustainability of remaining funds.
Purchasing an Annuity: To ensure a steady income during retirement, members must use at least 2/3 of their savings to purchase an annuity. This option provides you with a regular income stream. Members can choose between a guaranteed annuity, which offers a fixed income, or a living annuity, which allows for some investment choice and flexibility in withdrawal rates.
Whether you should be choosing a living annuity or life annuity isn’t the purpose of this article and would require a deeper understanding of your needs and aims in retirement – which is where receiving professional advice becomes invaluable. But once you’re clearer on that, the question of which product/investment will best serve your needs has to be assessed. Should you stay in-house/in-fund? Or should you shop the open market to see if a living annuity or life annuity from another institution can offer you something better?
That’s where the value of genuine independent advice can play a massive role in helping you decide what the best option for you will be. Particularly where the advice isn’t dependent on having to sell you a particular option in order to be remunerated.
Consider Reading: How Independent Advice Can Give You A Greater Chance of Achieving Your Goals
Of course it’s in Old Mutual’s interests to try and keep you in the fund when you retire by making it as simple and easy as possible to do so. But it’s important to be aware of the pros and cons of staying within the fund compared to choosing an option available from the open market. But in essence you have two In-Fund options:
Both are good products but understanding their limitations and the pros and cons of each will help you reach a more informed decision that is in your best long-term interests.
There is nothing wrong with the Max Income Living Annuity product. But it’s important to be aware of the constraints of staying in the fund, particularly because of the more limited investment choice and the trustees ultimately still having the sole say in who inherits your remaining benefits on death, which can be a lengthy and fraught process. But the simplicity of staying in the fund and often the lower ongoing charges might make it worth your while. It’s a conversation to be had and explored. We’re not pre-disposed to either.
A With-Profits Annuity aims to give you the best of both worlds. A guaranteed income for life, but with the benefit of annual escalations linked to the performance of an underlying investment fund. That can mean higher annual increases of your income in times of good market performance, or low/no annual increases when markets aren’t performing.
The With-Profits Annuity as is offered as the in-fund solution via the Old Mutual Fund Select Annuity is a good life annuity product. But With-Profits Annuities might not be for everyone – and if a life annuity is the right option for you – it’s still worth shopping the open market to see how annuity rates compare to what you’re being offered.
Depending on the rules of your specific retirement fund, you will typically have a PRI of 2.5%, 3%, 3.5%, or 4% to choose from as your With-Profits Annuity option.
In many cases the default PRI Rate different schemes have gone with is the 3.5% PRI option. How do the annual escalation on the 3.5% PRI stack up against inflation? See below.
Here it’s clear to see that on the 3.5% PRI Fund Select With-Profits Annuity option – that the average annual escalation achieved over 3-5-10 years is in all cases lower than CPI. So, the kinds of questions to be asking and comparisons to be making would be:
Simply choosing an option because it’s convenient if you haven’t done your research – could mean you’re costing yourself precious income. And that’s the value of working with an independent partner that could do the research for you and guide you towards the best option for your needs.
If at retirement you decide that a Living Annuity is the vehicle most suited to your needs, the question then becomes how to invest that capital. Our view is that investing for income post-retirement is more nuanced than when you’re still in the accumulation stage and building your retirement pot. Sequence of return risk is a major factor to consider, as is the optimal strategy and asset allocation that will not only provide you with the income you need, but also ensure your capital lasts through your retirement years.
For the most part, we tend to find (through our modelling) that many clients need an investment return that averages roughly Inflation Plus 5 through their retirement years (unless they able to start on a very low drawdown rate of 2.5% – 3% p.a.). In other words a return of about 10% p.a. (net of all fees).
Now if your investment choices are constrained by only being able to consider funds that comply to Regulation 28, it could mean you fall short and run out of capital sooner than anticipated.
There are four funds to choose from if you choose to stay in-house with the Old Mutual Max Income Living Annuity. A couple of smoothed bonus funds that offer certain guarantees and aim to offer a less volatile ride for investors who struggle with the ups and downs of being exposed to investments fully exposed to the performance of markets. And then a medium equity (low cost tracker fund) and high equity (multi-manager) choice of balanced funds.
Both the smoothed funds have delivered very good returns overs the last 3 years. But if you consider how all of these funds are delivering against their stated inflation related performance targets over 5-and-10 year time frames, their returns are generally disappointing.
Hindsight is a wondeful thing! But it’s important to see nonetheless how the investment options via the Old Mutual Max Income In-House Living Annuity compare to the best performing balanced funds in the industry.
Now building an investment portfolio is a bit like putting together a rugby team. You don’t necessarily pick the best player (or fund) in all cases – it’s about how you combine different funds that have different styles and philosophies to try and create the optimum long-term portfolio.
So we’re not saying you should invest in any of these funds – but merely trying to make a point – that it’s worth understanding the options available to you when building your Living Annuity portfolio. Because investment returns do matter – and the better returns you are able to achieve, the longer your money will ultimately last.
As with the balanced funds above, we’re not recommending any of these global equity funds, but based on your needs and risk tolerance, you might want a higher offshore allocation than Reg 28 allows in your Living Annuity, and therefore having the option of being able to access funds and investments outside of the In-Fund options may be important to you.
The point we are making is that there are hundreds of funds and investments to choose from when building a portfolio for your Living Annuity. So, whether you choose from one of the In-Fund options or go to the Open Market, doing your research and weighing up the pros and cons of each is important.
Changing jobs often necessitates making decisions about existing retirement savings. The SuperFund provides options to preserve benefits and ensure continuous growth of their retirement corpus:
Preservation Funds: Members leaving their job have the option to transfer their savings to a preservation fund. This move allows the retirement savings to continue growing tax-free, and members retain the ability to access a portion of these funds in case of emergency before retirement (subject to applicable regulations). Again, the question is, do you stay ‘in-house’ and opt for one of the funds available via the OM SuperFund, or go external?
Transfer to a New Employer’s Fund: If the new employer also offers a retirement fund, members may have the option to transfer their accumulated savings to the new fund. This ensures continuity in their retirement planning and can be beneficial if the new fund offers comparable or better investment options and benefits.
New Two-Pot System: Now members have the option to withdraw their savings pots annually since the introduction of the new two pot system. This is generally not recommended due to the tax implications and the impact on long-term retirement readiness. It’s crucial to consider future financial security before opting for this route.
Read Next: Avoid Some of these Bad Performing Balanced Funds With Your Hard Earned Retirement Capital
Even though we regard ourselves as truly independent at Henceforward and are totally product agnostic (via our unique fee model that doesn’t depend on how much you invest or that you purchase a financial product) – we are an Old Mutual Wealth Strategic Partner. That means we understand the Old Mutual eco-system and how the Old Mutual Superfund works – and when you retire or resign we will always aim to keep your retirement savings with Old Mutual – but we will consider what is best for you and how to help you achieve what is best for you. And that means weighing up all the options.
Who We Work With:
1. If you’re retiring from the fund and have more than R10 million in retirement savings – The Henceforward Retiree Package may be for you. It’s a customised, holistic service that aims to to help you achieve all your lifestyle goals in retirement.
2. Should you be resigning from the fund and work in professional or executive role – The Henceforward Professional/Millennial Package could work for you.
Other Questions to Be Asking:
1. Instead of a living annuity or life annuity, perhaps you want a combination of both? There are various hybrid annuity products available today that can facilitate that.
2. If you decide that a living annuity is the route you want to go, make sure you start with a sustainable drawdown rate, preferably no more than 4% to begin with (unless you have access to a lot of other capital/sources of income).
3. For larger investment amounts (typically over R10 million), investing in a direct share portfolio (rather than buying funds) might be of interest because not only is it usually a lot cheaper, you also have a lot more say in what is invested in your portfolio.
Further Reading: Why We Believe in a Flat Fee Remuneration Model and How That Benefits You
The decision between an In- Fund Annuity and an open market option hinges on your preferences for simplicity versus flexibility, your desire to actively manage your retirement income, and your sensitivity to costs. Here are a few considerations to guide your choice:
Evaluate Your Financial Goals: Consider your income needs, life expectancy, and financial goals. If you prefer a hands-off approach with lower fees, an In Fund option might be suitable. For those seeking specific investment choices and flexibility, the open market could provide a better fit.
Understand the Fees: Compare the fees of In Fund and open market options, including administration and investment management fees, as these can erode your retirement savings over time.
Consult a Financial Planner: Given the complexities and long-term implications of your decision, consulting with a financial planner can provide personalized insights based on your financial situation and retirement goals.
We are unable to assist with two-pot withdrawal requests. Please contact the fund or your fund administrator directly.
If you’re retiring in 2025, get yourself a FREE COPY of the Henceforward Retirement Insights Guide. It will guide you in everything from planning for your retirement; weighing up the differences between a Living Annuity and Life Annuity; understand how to construct an investment portfolio with your retirement capital; and get you thinking about the fees and costs of the different options.
Download Your FREE GUIDE HERE
Carl-Peter is a Director and Partner at Henceforward. He is a CERTIFIED FINANCIAL PLANNER with over 20 years experience. Henceforward are an Old Mutual Wealth Strategic Partner and therefore able to help individuals retiring or resigning from the Old Mutual SuperFund, weigh up all their options, and make the best decision for their needs and goals.
