Disability or retrenchment

You could lose retirement benefits

 

By Bruce Cameron
Co-author to The Ultimate Guide to Retirement in South Africa

 

Disability or retrenchment: You could lose retirement benefits

A financially secure retirement, like growing older, is no easy thing. Or as the saying goes – it is not for sissies. Both need hard work.

My co-author of The Ultimate Guide to Retirement in South Africa, Wouter Fourie, recently wrote that retirement is not just about saving in a retirement fund and hoping for the best. There are a lot of other questions that need to be asked about retirement – long before you retire. And most retirement fund members need advice to ensure a financially stable retirement. (Read more here Why retiring at 60 could be the most expensive mistake of your life - The Ultimate Guide to Retirement in South Africa)

Wouter mentioned a number of examples; and, it is worth adding one more, namely disability assurance.

Most people with a beggarly pension are the cause of their own misery. Most impoverished pensioners have a dismal retirement a result of what they did before retirement:

• Started saving too late;

• saving too little;

• withdrawing their funds (including through the two-pot system); and,

• not saving for the higher ‘pensioner inflation’ in retirement above average inflation caused by high rates and services bills, high healthcare costs and tax. (Read more here Pensioners inflation is higher than average inflation - The Ultimate Guide to Retirement in South Africa)

But there are those who have a pauper’s pension where it is not their own fault. These are pensioners who ‘retire’ before they reach retirement age because:

• They were forced to claim permanent disability assurance, as a result of being too ill to continue working. This could because of an illness or serious injury; and,

• they may have left their jobs (either as a result of retrenchment or resigning) and then not been able to find re-employment. And re-employment can be limited depending on how old you are. Those in their fifties and sixties are the most vulnerable. In the later years most people are ‘empty nesters’ when many individuals often add more to their pension savings while still working.

 

Group life assurance

One of the big advantages of being a member of a retirement fund is that it normally comes what is called ‘group life assurance’. This assurance pays out to your dependants if you die; and, to yourself if you are temporarily or permanently disabled.

Group life assurance payment happens while you are working or being injured at work or away from work.

The problem is that group life assurance hardly ever pays out more than 75 percent of your current salary (your base salary without any allowances).

You may get 100% if you have other private policies but you will never receive more than 100% as a result of an agreement between assurance companies. The main reason is to prevent fraud.

The big problem you face you will face a significant drop in income, which inflation will tend to make worse. You will effectively be on a fixed income, but you will now face ongoing issues of increased medical bills and increased tax (mainly through fiscal drag). Unfortunately, the industry organisation, the Association of Savings and Investment SA (Asisa), does not keep separate industry figures for disability assurance only providing total payout figures for all life benefits.

If you are assured by either group and/or individual life, then the outcome will also depend on the conditions of your group life assurance policy. Your worst case scenario is that at your normal retirement age your disability insurance will end, and you will need to rely on your accumulated pension on which no waiver of contributions has been paid.

There are a number of very important things you must ask your retirement fund (from the start of your membership) about your group life assurance. Group life assurance, which includes disability assurance, can differ severely from one policy to another:

 

Premium Wavers

Does the group life assurance allow for:

• Retirement fund waiver: If the group life assurance does not allow for this you will need to buy other private assurance that will allow for this payment. For example, you could buy a retirement annuity that also includes a waiver to allow for the continuation of premiums paid by the assurer.

• Medical aid waiver: This is normally only paid for a limited period while you are waiting for the disability payment. This can be anywhere up to 24 months. But you will still need medical aid cover. The best way to cover this is with an insurance policy that will pay out an equivalent amount that will take care of the premium at a minimum.

Both require financial advice to insure you are covered properly. Too much insurance is as bad as too little insurance. But according to the Association of Savings and Investment (SA) research you are more than likely to be under-insured.

 

Choice of benefits

• ‘Own occupation’ or ‘any occupation’: This is of key importance. If you are insured for ‘own occupation’ you must be able to continue in the same job. If you are insured with ‘any occupation’, you may not be able to continue your occupation as a deep-sea diver, but you could fill other occupations from being librarian to working in a call centre.

• Rehabilitation training: This applies to both permanent and temporary disability with often includes reasonable training for a new job.

• Temporary income disability: This pays out while the assurance company investigates your claim leading to a permanent disability claim; or you may only be incapacitated for a brief period. This could take up to 24 months.

• Permanent Lump-sum disability: This pays out a tax-free lump-sum if you are found to be permanently disabled.

• Permanent income disability: This pays out a monthly amount until you recover and return to work, you die or reach retirement age.

  • If you die you must ensure that your retirement fund savings will be paid out to people who depend on you for an income;

  • the income will be sufficient for their needs; or

  • will disability payments continue.

• Other issues to check include:

  • In most cases you do not need a medical checkup with group life assurance. Some policies may require a declaration of any illnesses you may suffer from, and your insurance could then be limited to partially or fully exclude a problem you may have. Other policies have requirement that you have a medical checkup if you earn a larger salary and again exclusions could be placed on the policy.

  • Waiting periods also vary so you need to check this as well. This makes the use of an emergency fund essential to cover that period which is not covered by assurance;

  • You may also find the assurance company could help pay for your recovery and to return to work for both temporary and permanent disability;

  • You will need to complete forms which may include statements by yourself, your employer, your medical doctor and also an independent doctor appointed by the assurance company,

  • Fraud is high in the area of disability. You should not consider a false claim as you could then lose everything, including your employment. Most life assurers have investigators who look for fraud. For example, a farmer who says he has back problem but is found to be loading sacks of grain. This is fraud.

• The consequences: You need to be aware of when a policy will pay out and how much will be paid out. If it is not enough you need individual life assurance.

 

Retrenchment

For people who are retrenched, dismissed or resign the position could be far worse. They will have no disability assurance although they may have individual retrenchment assurance. But the big issue is they will no longer be able to save for retirement, will not be able to add extra amounts as an ‘empty nester’ and may have to use the two-pot system to withdraw some of their savings (with the additional cost of administration and penalising tax)

 

What to do

You must plan for how you handle these issues long before you retire. Anyone can be hit by the bus. You need to:

• Check out your Group Life Assurance (if you have it);

• You need to check out your individual assurance; and,

• Most people need help from a qualified financial adviser (preferably someone who is a certified financial adviser accredited by the Financial Planning Institute)

 

For more detail on early retirement read The Ultimate Guide to Retirement in South Africa. For more information on how to purchase the book go to Buy Now on the website www.retirementplanning.co.za

 

Read more on this topic here:

Why retiring at 60 could be the most expensive mistake of your life - The Ultimate Guide to Retirement in South Africa

Why a one size fits all retirement plan could be your biggest risk - Ascor® Independent Wealth Managers

Why good intentions won’t save your retirement  but this will - Ascor® Independent Wealth Managers

Five retirement mistakes that could cost you your financial freedom - Ascor® Independent Wealth Managers