We revisit some of the case studies published by the FAIS Ombud that illustrate the difficulties people encounter when trying to access their retirement funds and how advisors can prove that their clients were properly informed.
It is a financial advisor’s duty to make sure that the needs and goals of their clients are properly understood and to clearly explain to them how the recommended financial products work. Where there are constraints or limitations to the product, as is the case with retirement annuity funds, do you have documented evidence that you explained to the client what access they will have to those funds? Many of the complaints received by the FAIS Ombud in regard to retirement annuity funds relate to the fact that the complainants allege that they were not made aware that they cannot ‘withdraw’ further lump sums from the remaining two-thirds of their retirement savings. In addition to this, many of the complainants had already accessed the one-third portion of their funds.
In this article, we revisit FAIS Ombud case studies that illustrate the difficulties people encounter when trying to access their retirement funds. These highlight the importance of keeping detailed records of your discussions with your clients so that if you are called upon to prove that a client was informed about the product, you can do so with ease.
Case study 1: MrV vs Provider
Two years after purchasing a life annuity with the insurer with the capital amount of R 503 000, Mr. V made several attempts to withdraw a further lump sum from the remaining two thirds of his retirement savings because he needed the money to make certain payments. The insurer explained that the withdrawal was not possible as the law simply did not allow it. A complaint by Mr V was then lodged with the FAIS Ombud.
In his complaint, Mr V stated that prior to purchasing the annuity, he had informed the provider that he would like to have access to his funds as and when the need arose. The response by the provider allegedly was that Mr. V could still access the funds at any time. All the complainant needed was to write to the insurer and request the amount needed.
In this case the Ombud could not help the complainant regarding the appropriateness of the advice given by the provider.
- It is common that complainants say that they were not aware that upon purchasing a life annuity, the capital ceases to exist and is replaced by an obligation on the part of the product provider to pay the annuity until the end of the annuitant’s life. It is therefore important that this is clearly explained to the client and that this is documented at the time that the advice is given to the client.
- It should also be clearly documented that it was explained to the client what portion of the funds the client will be unable to access.
- It is only possible for the Ombud to assess the appropriateness of the advice given to complainants based on the records and documented correspondence kept by the advisor. It is therefore to the advisor’s benefit to ensure that as much detail is captured on the Record of Advice to prove that he really did explain and inform the client of any limitations applicable.
Case study 2 – Tax Implications and Retirement Annuities
The complainant met with his advisor wanting to withdraw R600 000 from his Provident Fund. He was informed that he could access R315 000 tax free and of the remaining R285 000 only R36 000 would be taxed. However, SARS deducted R216 059 as tax. The complainant was infuriated with his advisor and lodged a complaint with the Ombud alleging that his advisor had failed to inform him of the tax implications applicable at the time financial advice was provided to him.
According to the correspondence received, the advisor stated that the complainant had failed to disclose he had utilised his tax free benefit prior to consulting with him. However, the complainant was certain he had informed the advisor he had taken a retrenchment package before and requested that all his funds be paid out in full. To decide on the differing version of events the Ombud required compliance documents from the advisor detailing which information was gathered from the complainant prior to providing advice. It was clear that the complainant had disclosed having taken his retrenchment package at the time the financial advice was rendered.
The Ombud emphasised that although the provider was not a tax practitioner, he ought to have known of the tax implications, given the information furnished by complainant. At the very least, Mr B should have sought assistance from the appropriate authorities. An offer of R100 000 was made to Mr B and the matter settled.
- Relevant information should be gathered by advisors prior to providing financial advice and services to their clients.
- Limitations on the part of the advisor should be clearly disclosed to clients.
- Tax implications relating to withdrawal of lump sums at retirement should be discussed and verified from SARS.
- All matters are decided based on the documentary evidence provided. An advisor must therefore be in a position to provide his record of advice and information gathering process should an investigation into a matter be lodged.
To read the full case studies, click here