During the first phase, the employer transfers mandatory pension contributions to the UAPF. In the second stage, a tool that will ensure the receipt of a guaranteed personal monthly payment, annuity, is needed. The main point of this insurance product is a guaranteed income stream, often for life, sounds pretty attractive, but critics quickly point out flaws.
Let us consider the positive and negative aspects of retirement annuity.
Pros of Annuities
In Kazakhstan, a retirement annuity agreement is concluded by men at the age of 55 and older, by women - 51 and older. A LIC makes monthly lifetime payments, which increase by 5% annually under a retirement annuity agreement.
The product has many perks, the main being an early access to the money accumulated by the client in UAPF without waiting for retirement age. “Besides, the client is guaranteed he will not be broke at the advanced age. If money is received from UAPF, then payments are made until the money ends on the client’s account. This situation is impossible in LIC, as payments are lifelong,” said Ramai Kurbangaliyev, the Sales and Regional Development Director of JSC LIC Nomad Life.
The amount of payment made to the client does not depend on effectiveness of the investment policy of a LIC. Payouts will be annually increased anyway. When receiving money from UAPF, the amount depends, inter alia, on how efficiently UAPF invests client’s money. Halyk Life reminds that annuities provide an opportunity to receive pensions from three sources: “Upon reaching retirement age, a person gains access to the basic pension (length of service until 1998); annuity payments under a retirement annuity agreement; payments from UAPF, formed after a retirement annuity contract conclusion until retirement.”
The main condition for the contract conclusion is that a person has to save an efficient amount on his pension account: 10,001,551 tenge for men and 13,695,035 for women. In case the required amount is accumulated, it is possible to enter a retirement annuity agreement with a life insurance company. In this case, pension will be paid by LIC, and annuity payments will be paid lifelong.
The amount of annuity payments depends entirely on pension savings, but cannot be lower than the minimum pension established by the legislation of the Republic of Kazakhstan at the contract conclusion date. In accordance with the Law of the Republic of Kazakhstan “On the Government Budget for 2018-2020,” the minimum monthly pension is 36,108 tenge. “If a minimum necessary amount is accumulated at UAPF and retirement annuity agreement is signed, then after reaching 55 years for men and 51 for women, the approximate monthly annuity payments will be 36 thousand tenge,” explains Azamat Yerdessov, the Board Chairman of LIC Freedom Finance Life.
In retirement annuity agreements, the insurance premium is a lump sum payment made out of UAPF. “Supposedly, a 55-year-old man has accumulated 15 million tenge in the UAPF. He enters into a retirement annuity agreement with a LIC. The monthly payment in the first year will be 49,135 tenge. In a year, it will increase by 5% and be equal to 51,592 tenge. In another year it will be 54,171 tenge. In 20 years’ time, by the way, the monthly payment will already be 124,162 tenge, and by that time the total amount of payments will already exceed 19.4 million tenge. If the RA agreement owner lives safely for the first 20 years and later, then the LIC will send payments to him until the end of his life,” a Nomad Life representative shared the details.
In other words, a retirement annuity is a guaranteed insurance product that protects its consumer from investment and survival risks.
Another pro is that in case a person loses his ability to work or dies in the performance of labor duties, a material damage to him or the dependents of the deceased is reimbursed under the annuity agreement. “Supposedly, a person was injured in the performance of labor duties. His salary is 200,000 tenge a month. Loss of ability to work is 50%. Until health is restored, the LIC will pay the injured 100,000 tenge per month. This amount will be annually increasing by inflation index,” says Ramai Kurbangaliyev.
Cons of Annuities
This product has disadvantages as well, and last but not least is their cost compared to other investment options. Another con is that in case of death of a UAPF client, the money accumulated by him is transferred to his heirs. The LIC ceases payments if the guaranteed period term is not included in the contract (a guaranteed period is a period during which payments are made regardless of whether the client is alive or not). “If the retirement annuity agreement includes a guaranteed period term, then such a situation is impossible, payments will be sent to the heirs before the end of the guaranteed period,” the representative of Nomad Life said.
Another risk when switching to retirement insurance may be a wrong choice of a life insurance company. If a person faces such a choice, he should first select the most reliable companies based on the size of the assets and compliance with the prudential standards of the National Bank. Then he should choose the most profitable products.
According to experts, the younger a person, the easier it is for him to build up a large pension capital without much effort. For example, a 30-year old male client enters into an accumulative life insurance contract for a period of 15 years with a quarterly payment of insurance premium in the amount of 15,000 tenge. “He chooses insurance for disability categorization of group I and II as a result of an accident with the payment of insurance compensation as an additional coverage. The insurance amount to be received by the client at the end of insurance term is 1,017,000 tenge,” Halyk-Life shared its calculations.
If the client pays 10,000 tenge each month, the insurance amount will be 2,005,000 tenge. “If we consider the same case, but the client is a 30-year old woman, the insurance amount with a monthly insurance premium of 10,000 tenge will amount to 2,024,000 tenge, and with a quarterly payment of 15,000 tenge - 1,026,000 tenge”, Halyk-Life concluded.
Who needs annuities? - Everyone who has savings, people who want to have a steady income at the advanced age.