Col 7: Dementia requires special retirement planning
Consider a blended annuity for retirement income if you are concerned about dementia.
By Bruce Cameron
Co-author of The Ultimate Guide to Retirement in South Africa
Dementia is something that more and more people face mainly as a result of significant changes to how long you will live.
Last week this column was about using a blended annuity, which combines a living annuity and a traditional guaranteed annuity, to create a guaranteed income flow.
If you are suffering from the early stages of any cognitive disease, including dementia and Parkinsons, a blended annuity could also secure you a risk-free monthly income.
The big problem for people suffering from dementia is that there is no such thing as a ‘continuing (enduring) power of attorney’ in South Africa.
A ‘continuing power of attorney’ means if you suffer from dementia or any other cognitive disease that affects your mental capabilities you cannot rely on any power of attorney.
For a power of attorney to be valid in current South African law you must be of sound mind.
The problem is these ‘sound of mind’ diseases mostly affect people over the age of 65.
And the big problem is more and more people are living longer – and more are suffering from these diseases.
Recent research by actuary, Bjorn Ladewig, head of distribution at pension specialist, Just Retire, says if you retire as a man at 65 you will have a 1 in 10 chance of still being alive at 95; and, if you are a woman of 65 you will have a 1 in 10 chance of being alive at 100. That is an extra five years for women.
Remember when the first pension scheme was launched in Germany in the 1860’s, anyone who lived to age 60 was expected to die on average by age 62 – substantially reducing the chances of suffering from a cognitive disease.
Ladewig says there is now as a result of longevity, a growing number of individuals who could be grappling with these life-altering diseases.
According to Alzheimer’s Disease International, every three seconds someone is diagnosed with dementia, and by 2030, up to 78 million people globally will be affected. The World Health Organisation supports these devastating facts estimating that at least 139 million people could have dementia by 2050. These figures are up from 55 million people impacted in 2019.
South Africa is one of the few countries that do not have a ‘continuing power of attorney’ Combine this with improved longevity figures and you need to ensure that you will financially survive such a disease. This needs very careful planning.
There are ways to cover some of the bases such as relatives applying for a curator bonus to be appointed by the courts. But this is not an unfettered power, for example a will cannot be signed on your behalf.
You could also register in advance with the Master of the Supreme Court (which SARS allows) a special Type A trust if you fear you may start suffering from a cognitive disease. There are however still costs, such as capital gains tax, involved in transferring assets to the trust. This choice would mainly be limited to higher income individuals.
There is a lot more on this issue and the choices in Chapter 17 in The Ultimate Guide to Retirement in South Africa (www.retirementplanning.co.za).
One of the problems of cognitive diseases is that they are gradual. Even people with advanced dementia will often have sound moments.
The biggest challenge anyone faces is having a realistic monthly pension paid every month from retirement savings until the day you die.
An important choice is to look at the design of your retirement income from products that are available to you to ensure a continued income flow to you and your partner.
Ladewig, quite rightly says, a blended annuity presents a compelling option, allowing investors to have some funds in an investment linked living annuity structure, where the investor takes all the risk; and, some allocated to a life annuity portfolio, where a life assurance company takes the risk that it will pay an income to you (and your partner) until you die.
The two big risks with a pure living annuity is that, annually, you must make a choice of the percentage of capital you will drawdown as an income; and, how to invest your capital.
These choices for pensioners suffering from a cognitive disease often result in fraud from individuals, such as caregivers and even relatives. The result is many people run out of supporting income long before they die.
Ladewig also adds pensioners suffering from one of the diseases could also make the wrong decisions.
By combing both annuity products in a single blended living annuity allows you to put all or part of your living annuity in the guaranteed annuity as part of the underlying product choices.
There are numerous choices in transferring enough capital in a guaranteed annuity to ensure your basic income needs are met; through to, deciding annually how much should be transferred in a particular year.
Ladewig says ‘by opting for this, retirees purchase a consistent stream of income that is guaranteed for life. Another advantage is that there are no further choices required in terms of the income stream, which may only have complicated matters at a time when cognitive abilities have declined’.
Armed with knowledge, foresight, and a strategic selection of retirement products, it becomes easier to navigate any financial complexities associated with cognitive diseases, ensuring a dignified lifestyle even in the face of uncertainty.
‘Retirees often underestimate the magnitude of living expenses during retirement. Apart from routine living costs, you need to account for potential expenses related to Alzheimer’s. This could include expensive medication or frail care, which costs in the region of several thousands of rands a month,’ he says.
It is important you discuss these issues and the solutions with your financial planner and your family to determine what you will do if you have the bad luck of suffering from one of these diseases.
There is a lot more detail on this in the book, The Ultimate Guide to Retirement in South Africa.
For more information on how to purchase the book go to Buy Now on our website www.retirementplanning.co.za
Related Topics:
https://retirementplanning.co.za/scary-pension-fund-withdrawals/
https://retirementplanning.co.za/unpacking-investment-linked-living-annuities/
https://retirementplanning.co.za/advice-living-annuities/
https://retirementplanning.co.za/living-or-guaranteed-annuities-2/
https://retirementplanning.co.za/hybrid-annuities-retirement-fund-defaults-may-be-the-cheaper-options/
https://retirementplanning.co.za/hybrid-annuities-some-of-the-choices/