My monthly pension is low
DRAW LEVELS: HOW TO INCREASE PAYOUT
New rules allow drawdown rates of between 0.5% and 20% until 30 September.
AMoneyweb reader asked: I went on early retirement four years ago and took one-third tax-free, which I invested. Now my monthly pension is no longer enough. Is there a maximum to which I may increase the monthly payout in order to meet my monthly payment obligations? I know it will eat into my capital, but that is all I can do now, as Covid-19 has very badly affected pensioners.
Craig Torr, who is a certified financial planner, answered:
In terms of legislation, you must draw a pension income from your living annuity at a minimum of 2.5% per year and a maximum of 17.5% per year of the value of the residual capital.
You can choose whether to draw down on a monthly, quarterly, bi-annual or annual basis, with this largely being dependent on your personal circumstances and income needs.
On the anniversary of your policy each year, you have the option to change the level at which you draw down from your investment, although this should be done in partnership with your financial advisor to ensure that your withdrawal rate is sustainable.
In general, to protect your capital you will need to draw down at less than 4% of the value each year. If you draw too much from your living annuity, you may reach the 17.5% cap too soon, and this can severely impact your cash flow later in retirement.
However, as a response to the financial hardship suffered by many as a result of Covid-19, National Treasury has decided to relax the living annuity draw-down rules temporarily. As such, annuitants are permitted to adjust their draw-down rates to between 0.5% and 20% for a period of four months, from 1 June to 30 September.
Before adjusting the draw levels from your living annuity, it is always advisable to seek independent financial planning advice. From your question, it is unclear whether you have any discretionary investments in place that you are able to access. Further, it is unclear how the underlying assets in your living annuity are invested and whether you are taking appropriate investment risk for your investment timeline, bearing in mind that you are only four years into early retirement.
The fact that increasing your draw-down will result in you eating into your capital is of concern, especially as you may have many years of retirement ahead of you.
My suggestion is to get advice from an independent advisor who can take a holistic view of your financial position, including your budget and living expenses, any other investments you have in place, whether you have other assets that can be liquidated, how your underlying assets are invested, and what your goals are for the rest of your retirement.
Being a relatively young retiree, you could have a number of decades ahead of you that you need to plan for, and we recommend that you seek expert advice.
Craig Torr is a certified financial planner
If you draw too much, this can affect cash flow