The average income drawdown rate for living annuities continued its slow yet steady decline in 2015, edging a little closer to the recommended five percent of capital.

The 2015 Living Annuities Survey, released by the Association for Savings and Investment South Africa (Asisa) this week, shows that last year living annuity policyholders withdrew, on average, 6.44 percent of their capital as income.

A living annuity is a type of pension that, unlike a guaranteed annuity, does not guarantee a regular income. Your returns, and hence how much you can safely draw as income, are dependent on the performance of the underlying investments, which you choose.

Peter Dempsey, the deputy chief executive of Asisa, says that living annuity policyholders are required to draw a regular income of between 2.5 percent and 17.5 percent of their capital annually, but you risk eroding that capital if you draw more than five percent a year.

“This is why we get excited when we see the average drawdown rate decreasing each year, even if it is marginal,” Dempsey says.

When Asisa began collecting consolidated statistics on South Africa’s living annuity book in 2011, the average drawdown level was 6.99 percent. This means that over the past five years there has been a decline of just over half a percentage point.

“Given the rising cost of living, which affects most severely those no longer in a position to generate an additional income, we are encouraged that pensioners, on average, have not resorted to increasing their drawdown rates.”

Dempsey says income drawdown levels must be reviewed annually to ensure that they do not exceed expected portfolio returns.

“When the percentage of income drawn exceeds the returns of the investment portfolio supporting the living annuity, the capital base will be eroded over time,” Dempsey says.

He recommends, therefore, that a sustainable drawdown level is selected with the help of a trusted financial adviser who will take into consideration factors such as income needs, the composition of the underlying investment portfolio as well as the performance of the underlying assets.

He adds that policyholders who use a financial adviser generally select lower drawdown levels because they better understand the long-term implications.

Living annuity policyholders are allowed to review their drawdown rates once a year on the anniversary date of the policy.

At the end of 2015, South Africans had R331.6 billion (R278.9 billion in 2014) of their retirement savings invested in 410 898 living annuities (360 894 in 2014). In 2015, living annuities attracted new inflows of R58 billion compared with R46.5 billion in 2014.