Go-ahead for adjusting drawdowns
In covering the minister’s announcement, Personal Finance incorrectly stated that the measures would be effective immediately (“Living annuitants can up drawdown immediately”, Personal Finance, May 2). However, on approaching their annuity providers, readers found this not to be the case. In fact, it has taken six weeks for the measures to take effect.
Under normal circumstances, pensioners with living annuities may change their annual drawdown rate - the percentage of their capital they can withdraw annually as income, which can be paid out monthly - once a year, typically on the anniversary of the inception of the policy. The rate they choose must be in the 2.5% to 17.5% range, but in order for the annuity to be sustainable, the rate needs to be towards the lower end of this range.
This week, the Treasury amended the regulations, allowing living annuity policyholders temporarily to adjust their annual drawdown rate, instead of waiting for their next contract anniversary date. The range has also been temporarily extended, to a minimum of 0.5% and a maximum of 20%.
In a press release detailing the measures, the Association for Savings and Investment SA (Asisa) says: “In terms of amendments to Government Notice 290, issued under the Income Tax Act, living annuity policyholders will be able to amend their drawdown rates between June 1 and September 30 this year.”
This means if you’re a living annuity pensioner, you can increase or decrease your monthly income payments (according to the adjusted annual drawdown rate) for June to September, but will have to revert to your original annual rate for your October income payment.
The Treasury has also increased the threshold (known as the “de minimis” amount) below which the capital of a living annuity may be taken as a lump sum, from R50000 to R125000. “This is a permanent increase and does not revert back to R50000 after September 30,” Asisa says.
Jenny Gordon, head of technical advice for investments, product and enablement at Alexander Forbes, points out that if your anniversary date falls within the four-month relief period, and you have changed your drawdown rate for temporary relief, you must also select a drawdown rate that will apply on termination of the relief period.
“This will also apply to new living annuities starting within the relief period. The rate that shall apply after the relief period must fall within the percentages 2.5% to 17.5%. In all cases, the drawdown amounts must be calculated based on the value of the assets (net of costs) at inception of the contract or at the last contract anniversary, whichever is the later date,” Gordon says.
Rosemary Lightbody, Asisa’s senior policy adviser, says the measures are aimed at assisting retired people who may have seen a significant drop in the value of their underlying investment portfolios as a result of extreme volatility in financial markets triggered by the Covid-19 pandemic.
She says the lowering of the minimum drawdown level to 0.5% is good news for living annuity policyholders with high equity exposure in their underlying investment portfolios, as it enables them to reduce their income to prevent it from eating into their capital base.
“Our concern is for those 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 the market volatility. Withdrawing a larger portion of your 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 your retirement capital.”
Earl van Zyl, head of product development at Allan Gray, has welcomed the amendments.
“The more relaxed regulations will allow many retirees to make short-term adjustments to their income, and provide their families with relief during this extremely uncertain time,” he says. “However, flexibility can be a double-edged sword, and there are many pitfalls of using this flexibility inappropriately.”
One such pitfall is that if pensioners do not adopt these measures in a sustainable manner, the changes made may place them at greater risk of outliving their savings, Van Zyl says.