Living annuity crisis ahead

DRAWDOWN RATE HIGHER: MASKS THE TRUE PICTURE

Many living annuity policyholders may run out of money amid a surge in longevity and floundering returns.

Many pensioners find it increasingly difficult to maintain their standard of living without withdrawing more of their capital, says Asisa’s Taryn Hirsch.

Many living annuity (LA) policyholders face the risk of running out of money in retirement due to a surge in longevity, floundering returns and an increase in average drawdown rates.

Association for Savings and Investment South Africa (Asisa) statistics show LA policyholders withdrew on average 6.62% of their capital as income in 2016, slightly more than in 2015.

See the average LA drawdown rates over time.

Traditional LAs don’t guarantee a regular income. Legislation allows retirees to draw 2.5-17.5% a year, but the retiree bears the investment risk (that investment returns won’t be enough to compensate for drawdowns) and the longevity risk (that the money dries up before they die).

Most South Africans choose LAs, presumably because it allows a higher initial income in retirement if they haven’t saved enough; they can leave the remaining money to beneficiaries; and financial advisors often recommend these products due to ongoing commissions.

Hewett Wealth MD Peter Hewett says the stats are somewhat skewed by the wealthier component, who draw 2.5%. People with smaller retirement pots probably have a far higher drawdown rate than the average.

Further, the average includes pensioners of all ages, adds Just Retirement Life product actuary Johann Swanepoel. One expects people to increase drawdown rates over their lifetime to try to keep pace with inflation.

The average also takes new retirees into account. People who retired 10 years ago may on average be drawing a completely different percentage, he adds. But generally, people are drawing too much and must try to reduce drawdown rates; there’ll be more people running out of money due to longevity, Hewett says.

In a 2016 blog post Just argued an LA accident was “waiting to happen”.

“I think we are going to see generically a lower return environment… and people aren’t adjusting their lifestyles to accommodate that,” Hewett says.

Swanepoel says the real retirement problem’s much more significant. “People draw more than that [the average] and where they don’t have a lifetime income to protect them against outliving their assets, they are forced to underconsume and I think that is bad for a country… known to have underprovided for retirement. There are solutions which allow pensioners to draw more with less risk.”

Combining a lifetime income (with a guaranteed component) with an LA offers a balance between leaving money behind when pensioners die early and feeling secure when they live long, he says.

Advisors often recommend them