Sometimes I sit back in absolute amazement at the so-called advice handed out by some people in the financial services industry. Thank heavens that such people are in the minority.
Recently, a reader complained to me about advice from an independent intermediary from KwaZulu-Natal. We shall call him Mr X.
He, in fact, gets my nomination for a Personal Finance Darwin Award. This award is based on the website www.darwinawards.com, which "awards" people who die as a result of their own ridiculous actions.
The only difference here is that Mr X did not manage to kill himself; he only succeeded in losing a bit of money and causing himself a lot of embarrassment.
The story begins when Vuyani Ngalwana, the Pension Funds Adjudicator, issued a series of rulings against life assurance companies that were levying heavy confiscatory penalties on retirement annuity (RA) fund members who could no longer afford to pay their contributions.
In response to the rulings, Old Mutual announced its intention to pay back some money to offended members of its South African Retirement Annuity Fund (Saraf).
To qualify for compensation, Saraf members had to transfer their RA investments to Old Mutual's new range of Max products.
When Personal Finance reported the story, we made it absolutely clear that Old Mutual was still working out the details, which would be announced at a later stage.
We quoted Old Mutual advising that Saraf members should wait until Old Mutual made the details known.
Old Mutual's proposal was overtaken by the statement of intent, which was virtually imposed on the life assurance industry by Finance Minister Trevor Manuel in November last year.
This will see the life industry paying out almost R3 billion in compensation to RA fund members and endowment policyholders.
As in the case of Old Mutual's proposal, the details of the statement of intent are still being thrashed out.
But, Mr X decided that the Old Mutual offer had become effective the moment it was announced.
So he set out to cancel his clients' RA contracts and tried to get them to take out (not transfer) new Max RA products. By doing this, he would earn a new set of commissions.
After one of Mr X's clients saw the costs of the new product and the surrender penalties applied to his cancelled RA, he complained to Personal Finance that he had been ill-advised. We referred the case to Old Mutual.
Old Mutual found that the client had been ill-advised. It restored his membership of the fund he had abandoned and cancelled the new contract, which effectively put him back in the same position he would have been had he not cancelled his RA.
Mr X had to pay back the commission and bear the costs of cancelling the original RA.
But the story does not end there. We asked Old Mutual to check whether any other of Mr X's clients had suffered the same fate.
It turned out that there was another client, who was identified as none other than Mr X himself. So, not only has Mr X had to meet some of the costs incurred because of the bad advice he gave at least one client, but he became the victim of his own "advice" because he also incurred surrender penalties and new investment costs on his own policies. Therefore, the Personal Finance Darwin Award justifiably goes to Mr X.
The moral of the story: If you are advised at any stage to cancel a life assurance policy or an RA, exercise extreme caution.
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In recent weeks, a number of readers have asked about various issues concerning the statement of intent.
In terms of the statement of intent, life assurers that belong to the Life Offices' Association have agreed to enhance benefits in cases where they imposed penalties - which they say they did to recover "unrecouped expenses".
These penalties were charged when you reduced your premiums, ceased paying premiums (made a policy paid-up), surrendered a policy, transferred a policy, allowed a policy to lapse, or reduced your retirement age in the period between January 1, 2001 and the implementation date, which is still to be announced.
Where confiscatory penalties have been applied to the qualifying policies since January 1, 2001, life assurers will ensure that:
- As an RA fund member, your investment account is restored to at least 65 percent of its value at the date immediately preceding the early premium cessation.
If your RA is still with the assurer, the assurer will automatically credit your investment account.
You will have to apply to the assurer for this benefit if your RA has lapsed (in other words, if it has no investment value) and is no longer on the assurer's books.
- Endowment policies which are paid-up, or to which you are still paying premiums (those policies that are still on the books of the assurer), will be restored to the value of at least 65 percent of the investment account of the policy at the date immediately preceding the cessation of the premium.
You will not be entitled to this benefit if you have surrendered or allowed your endowment policy to lapse.
- Whole life policies with a savings element will be restored to at least 65 percent of the investment account of the policy at the date immediately preceding the premium cessation.
- Reversionary bonus policies do not have an investment account, but will be dealt with in a similar manner.
You will not qualify for an enhanced benefit if the penalties applied to your policy - especially in the case of policies held for longer terms - did not reduce the policy investment account value below 65 percent of what it was before the penalty was applied.
If you qualify for an enhanced benefit, the life assurance company will credit your investment account with the relevant amount plus interest equal to the actual policy fund return, up to 10 percent a year, from the date on which the penalty was applied.
The assurer will then let you know how the value of your investment has been enhanced.
In both the case of RAs and life assurance policies, if the penalty that was applied did not reduce your investment value to 65 percent, you will not receive any compensation.
Neither will the benefit or payment be reduced to the 65 percent level.
The life assurers have also agreed that in future, confiscatory penalties will be significantly reduced should you stop or reduce your premiums at any time. The level of the penalty is still being negotiated.
The final details of the agreement are expected to be announced only in October this year.
It is important in the intervening period that you do everything possible to avoid cancelling a policy or reducing or halting your contributions to an RA fund.
The important thing to remember about the statement of intent is that it sets the minimums and not the maximums of what will be restored to you.
As part of the statement of intent, it was agreed that an arrangement would be worked out between the Pension Funds Adjudicator and the life industry on how to deal with any further complaints from fund members.
Naleen Jeram, the deputy pension funds adjudicator, says in light of the statement of intent: "It was decided earlier this year that complainants about penalties will be sent by the Adjudicator to the respective funds to allow them an opportunity to settle the matters.
"We have given the funds and insurers 30 days to come back to us. Where the matters are not settled, we will issue rulings in those matters."
Most companies are offering RA members the minimums set down in terms of the statement of intent.
You do not have to accept the minimums and can still complain to the Pension Funds Adjudicator if you are not satisfied.