Illustration: Colin Daniel

RANDS AND SENSE

This year’s Budget has placed more pressure on retirees’ disposable income because of bracket creep. Simply put, inflation-linked pension increases may have pushed some middle- or high-income earners into a higher tax bracket.

In light of this, the tax relief on retirement savings has become more important.

The adjustments to the primary, secondary (for people aged 65 to 74) and tertiary (for people of 75 and older) rebates were below inflation: 3.17%, 3.8% and 3.25% respectively.

Once you reach retirement, how effectively you use your retirement savings is as important as taking advantage of the tax rebates. It is a concern that taxes are increasing as a result of below-inflation rebates, putting more pressure on retirees who may or may not have received an inflation-adjusted increase in their annuity income.

Financial pressure in retirement is compounded by: 

• Retirees drawing down too much income to sustain their assets; and 

• Failing to invest their retirement savings appropriately.

Recent amendments to the Pension Funds Act require the trustees of retirement funds to provide appropriate retirement strategies to members when they retire, to try to ensure that members’ savings will pay an income for the rest of their lives, eliminating the risk that they will outlive their assets.

However, many trustees are establishing default annuity strategies that inadvertently set up their members for failure, because they provided with little to no guidance about the sustainability of their income in retirement, and because they are not offered an option that will provide them with a guaranteed income for life.

Longevity risk

A key risk is outliving your assets in retirement and seeing your income fall dramatically in the final years of your life. Few retirees are in a position to assess this longevity risk. In fact, data shows that the average drawdown rate from living annuities is 6.6%, which is above the sustainable drawdown rate recommended by the Association for Savings & Investment South Africa (Asisa). To make matters worse, this average is skewed by the fact that some people with large retirement savings pots draw down very little.

The implication is that most living annuitants are drawing down an income at an unsustainable level that could result in them becoming dependent on their families or the state in the future.

Another mistake that retirees make is not growing their portfolio after retirement. Taking too little investment risk may contribute to retirees being worse off. A portfolio must consistently generate a return of more than 10% to ensure that a retiree does not outlive his or her assets. Ideally, retirees want to cover their basic living expenses so that they can grow the balance of their capital.

The solution is an asset class within a living annuity that allows you to draw a higher income than that recommended by Asisa, for this income to be guaranteed for life, and for the income to be targeted to grow with inflation. This will enable you to invest your remaining assets within the living annuity for long-term growth.

Just provides income solutions that improve the lives of retirees and meet their needs, while addressing the concerns that have been raised by National Treasury in recent years.

Justine Wyatt is the legal and compliance executive at Just.