Take care of your annuities in these precarious economic times
• With South Africans living hand to mouth with little in the kitty, drawdowns will be tempting
It isn’t only lower-paid employees and members of the informal sector who do not have a “rainy day” fund to take them through the pandemic. Right across SA many do not have a conventional pot of savings.
According to a survey by fintech JustMoney, few SA families (just 21%) can afford an emergency payment of even R5,000, and only 10% more than R10,000.
Almost 20% admitted they had never drawn up a monthly budget. More than two-thirds said they could not live a month on their savings. It found that 27% of people were planning to ask for a payment holiday on their debt. Instead, they consider their home and their pension fund to be their rainy-day fund.
Well, it won’t be easy to sell your house, except at a deep discount. Many people have taken 30% pay cuts, in the case of CEOs basking in virtue at the same time. We hope to get this supplemented by the Unemployment Insurance Fund, but it has proved so inefficient we might literally have to wait until Christmas for our May enhancement.
For pensioners there is temporary relief. Living annuities account for 90% of pensions in the private sector — public servants are paid pensions directly from the Government Employees Pension Fund on a predetermined “defined benefit” formula.
Cynics might say living annuities are popular because they provide a regular annual fee to the financial adviser. Every year the composition of the annuities has to be reviewed and the level of drawdown must be predetermined, usually between 2.5% and 17.5% of capital at the beginning of every year. Whether the work involved justifies a fee of 1% of capital is debatable.
Now, up until October 1, drawdown rates can be increased to 20% and, intriguingly, reduced to 0.5%. It is hard to see too many pensioners being able to afford to cut their drawdowns. But this might not be their only source of income. Many in their early 60s might still be working as freelancers, for example.
Rose Lightbody, senior policy adviser at the Association for Savings and Investment SA, says lowering the minimum drawdown level to 0.5% is good news for annuity holders with high equity exposure as it enables them to reduce their income levels to prevent eating into their income base.
“Our concern is for living annuity investors who opt to increase their drawdown rates, as this is likely to erode a capital base already under severe strain due to market volatility,” she says. “Withdrawing a larger portion of retirement capital should be an absolute last resort which is implemented only once you have completed a full analysis with your financial adviser to assess the long-term impact on capital.”
Holders of life annuities will not get any concessions. They are locked into either fixed rates or income that increases by a predetermined rate, such as the consumer price index or, more commonly, 5%. But at least these annuities will be honoured for life, unless the life insurer underwriting the annuity collapses. And even then it is likely that the book of policies would be bought by a surviving life office.
A hybrid annuity, which is the default of most pension funds, is the with-profit annuity. This guarantees a minimum income for life and declares bonuses based on the performance of the underlying investment portfolio. More and more of these annuities are being sold in pension funds, with the support of benefit counsellors, and they don’t require expensive advisers.
Sygnia and Alexander Forbes offer a product that converts from a living annuity to a withprofit annuity steadily over the first 10 years after retirement.
Living annuities have many moving parts. Their flexibility is an attraction, but also a weakness. People should not have to spend so much time managing these funds. Professional advisers can help, but it is the client and not the adviser who will suffer directly from bad decisions; clients can’t afford to delegate all responsibility.
Living annuities do not have an underlying guarantee and sometimes whither down to a few rand. Now if they fall to
R125,000 they can be cancelled and taken out as a lump sum.
The lifespan of living annuities can be unpredictable as it depends on the performance of the underlying investments. When they started in the mid-1990s, inflation was much higher and 10% drawdowns common; now anything more than about 4.5% is not considered prudent.
And look after the short term too, according to JustMoney executive Mannie Cristaudo. There should always be money available for unexpected expenses such as new tyres or a broken TV. Save enough to cover two to three months’ expenses, and when you can, start putting money aside into retirement annuities and unit trusts.
WITHDRAWING A LARGER PORTION OF RETIREMENT CAPITAL SHOULD BE AN ABSOLUTE LAST RESORT
LIVING ANNUITIES HAVE MANY MOVING PARTS. THEIR FLEXIBILITY IS AN ATTRACTION, BUT ALSO A WEAKNESS