CR194

Misselling – client not needing RA proceeds at age 70 – adviser recommending two annuities, one funding life cover, the other a 15 year endowment

Background

When the policyholder reached the age of 70 he did not need the income from his retirement annuity policy. He was still working and also received the income from another annuity. He was, however, obliged to retire from the retirement annuity because of his age.

There was a factual dispute as to whether the policyholder had stated to the intermediary, who was an agent of the insurer, that he would never need the income or whether he merely stated that he did not need the income at that time.

The adviser sold him two compulsory annuities for the full retirement annuity amount (i.e. no lump sum was taken). The one annuity fed a policy with life cover of the initial retirement amount (R377 149) and the other annuity funded a 15 year endowment. The policyholder did not actually receive any cash.

The policyholder complained to us when he had to pay additional tax to SARS on the two annuities. (Although he did not receive the annuities they accrued to him. The tax which the insurer had deducted from the annuities had not been sufficient to cover the tax liability in respect of these two annuities).

He had in the interim also been approached by another intermediary who pointed out to him that the obvious solution for his situation would have been a linked annuity in terms of which he could withdraw the minimum of 5%. The intermediary also pointed out that the current arrangement would have maximised commission and would also have incurred more costs.

The insurer’s agent and branch manager responded that a linked annuity had been discussed with the policyholder but that he had wanted no risk, that he was unwilling to provide his tax details to the adviser and that he had approved of the idea that the “inheritance” of the endowment could be postponed through a beneficiary appointment for ownership.

Discussion
We advised the insurer that we were concerned that a 15 year endowment had been part of the package. We had not been provided with any convincing reasons why a term of 15 years would be appropriate. There was no answer as to how this would be funded and what the implications would be if they were not funded. We pointed out that if a five year policy had been issued it could presumably have been extended after the term, if required.

We also questioned the insurer as to what would happen if the policyholder stopped working and was in need of income. This would then leave the endowment and life policy unfunded from the annuity. One would assume that the policyholder could eventually be in a position where he could not continue to work.

The other problem we raised was the one relating to the tax, namely that the policyholder would not be in receipt of income but would have to possibly fund the tax through other income. We were of the opinion that the adviser should have made the policyholder aware of the possible implications of his tax situation when the two annuities were taken out and accrued to him.

Result
With the lack of motivation from the insurer as to the reasons for this most unusual arrangement, we upheld the complainant’s complaint that the policies had been “mis-sold” to him. We invited the insurer to offer some alternatives to the complainant more appropriate to his circumstances. The complainant chose one of these alternatives, without any loss to him, and the case was closed.
JP
November 2006