These two options are available to supplement your income or as an alternative to your more traditional annuities. These investment options consist of two portions, which means that at the inception of the plan, your funds are split in two, with one portion providing a return on Investment and the other providing you with a guaranteed annuity income.
The Investment Plan with Income splits your funds into two, with a portion funding a 5-year endowment policy and the other portion providing a guaranteed annuity income for the 5 years. The funds used to purchase the annuity will deplete at maturity, and the funds in the endowment that are invested in the collective investments of your choice will generate a return over the 5-year period that will hopefully match or exceed your original capital amount. In other words, the funds invested for growth are not guaranteed. While there is greater upside potential, you run the risk of getting out a larger lump sum at maturity. Depending on market fluctuations, there is a chance of you getting out less than you originally invested.
This is not the case for the Guaranteed Investment Plan with Income, as the name suggests, and while it also splits your funds into two, with a portion funding a 5-year endowment policy and the other portion providing a guaranteed annuity income for the 5 years. The difference is that the funds in the endowment will provide you with guaranteed growth over the 5-year period that equals the original capital invested.
You therefore get your money back after five years. The alternative, however, is that your annuity income, which is also guaranteed, will be lower than that provided by the Investment Plan with Income. This is a very important decision for a prospective client to make. You must carefully consider your specific circumstances and determine whether a higher income with an uncertain investment outcome or a lower income with a guaranteed investment outcome is better suited to your needs. It is also vital that the Financial Services Provider that renders the financial service consider the client’s circumstances and make an appropriate recommendation.
Case Study: M v S
The complainant advises that on 04 October 2017, he invested R700 000.00 with the respondent in an Investment Plan. The complainant submits that it was agreed that he would receive monthly income from the interest earned on the R700 000.00. However, when the Investment matured in 2022, the complainant only received R470 000.00. He is unhappy with this and claims the balance of R230 000.00 of his capital investment.
In response to the complaint, the respondent submitted that in October 2017, a Financial Needs Analysis (“FNA”) was conducted by its representative. The FNA records that the complainant’s focus was investment planning, as he had R700 000.00 that he wanted to invest. The investment term was five years. The Risk Profile Analysis conducted for the complainant placed him as a “Conservative” investor. In addition, the Record of Advice (RoA) recorded that the complainant wanted to invest R700 000.00 for a period of 5 years and earn a monthly income from this capital investment. It was further recorded that the market risk of the Investment was explained to the complainant and that he fully understood his decision. The respondent claims that various products had been recommended and that the complainant had elected to invest R700 000.00 in the Income Investment Series. The Investment Proposal further advised that from R700 000.00, R428 175.67 would be invested, while the balance of R265 355.07 would be used to pay a regular monthly income of R4 544.64.
The respondent also confirmed that no guarantee was recorded in any documentation signed by the complainant. The investment matured in October 2022, and the complainant received a surrender value of R470 661.67, and the respondent contended that when one considered the monthly payments the complainant received to his benefit alongside the surrender value, he had received a total of R793 673.91 from his capital investment of R700 000.00. The respondent was, therefore, of the view that the complainant had not suffered a loss. After careful consideration, this Office recommended that the respondent resolve the matter with the complainant. In making its decision, this Office noted that the complainant was 51 years old at the policy’s inception and that the source of funds had been his retrenchment benefit
The complainant was, therefore, unemployed at the time, and these were the only funds available for him to generate an income. Considering all these aspects, there was a real need to first secure the complainant’s capital going forward, as his employment prospects were uncertain at that time, and he only had limited funds available.
This Office would have expected that a Financial Services Provider would have recommended a product, such as a Guaranteed Investment Plan with Income, that may have provided the complainant with a lower annuity income. Still, he would have retained his capital investment after five years. There is a duty on the Financial Services Provider to make a recommendation appropriate to the complainant’s needs. In this instance, no recommendation had been made, as the respondent’s representative had merely provided the complainant with the highest income possible, and there is no indication that there was any discussion as to the pros and cons of the product selected and how this may affect the complainant in the future.
There was, therefore, no indication that the respondent had complied with Section 8(1) of the General Code of Conduct or that the complainant had been placed in a position to make an informed decision as per Section 7(1)(a) of the General Code of Conduct. This Office also rejects the claim made by the respondent that when you consider the income received over the 5-year period and the maturity value paid to the complainant, he had, in fact, suffered no loss but profited from the Investment.
In the complaint submitted, the complainant had been under the impression that the income he was receiving was interest/return on his investment. He was unaware he was paying himself the income from his capital invested. Considering that he now has a lower capital amount with which to generate an income, which, in addition to the effects of inflation, has left him in a precarious situation, that argument cannot be accepted.
In response, the respondent contacted the complainant, and they entered into a settlement agreement where the complainant agreed to accept R103 301.89 in full and final settlement of the complaint.
Lessons Learned:
- When investing in such a product, you must decide whether a higher income or a guaranteed maturity value is appropriate for your needs and circumstances. Whilst a higher income will be beneficial over the short term, the effects of losing capital, especially when that capital cannot be replenished, have far-reaching consequences, especially when you factor in the effects of inflation.
- The role of the Financial Services Provider in recommending such a product is vital. One cannot simply treat the transaction as a single need. The prospective client’s overall situation and financial circumstances must be considered, as the decision ultimately made can have significant implications for the client’s future financial wellbeing.