Living annuitants can up drawdown immediately
A living annuity is a type of pension in which you invest your retirement savings in underlying investments (typically unit trust funds) of your choice and from which you must draw an annual income of between 2.5% and 17.5% of the value of the annuity.
How much you draw annually and the returns you make on your investments determine how long your money will last.
A requirement of a living annuity is that you may review your income drawdown once a year, on the anniversary or inception date of the annuity.
Wynand Gouws, a Certified Financial Planner professional and a wealth manager at Gradidge Mahura Investments, says that through the relief measures, annuitants can change their income drawdown immediately, instead of waiting until the next anniversary date.
“This is a temporary measure to assist people who either need cash flow immediately or who do not want to draw down more than necessary, if their underlying investments have underperformed,” Gouws says.
The measures, proposed by Minister but still to be ratified, are:
- Individuals who receive funds from a living annuity are allowed to temporarily immediately either increase (up to 20% from 17.5%) or decrease (down to 0.5% from 2.5%) the proportion they receive as annuity income, instead of waiting up to one year until their next contract anniversary date.
- Individuals are allowed to adjust their drawdown rates at any time during a four-month period, from May to August 2020 (irrespective of whether or not the contract’s anniversary date falls within the period).
- Any elections made during this period will be applicable for the four-month period only. The lapsing of this period will result in the drawdown rates automatically reverting to the rates applicable before said election.
Gouws says that most living annuity investors are invested in multi-asset funds, which have exposure to some growth assets - higher-risk assets, such as equities - to ensure the sustainability of their income.
“These funds decreased by 5% to 15% over the first quarter of 2020. The hard-hitting reality is that most living annuitants have seen a significant reduction in the values of their annuities and are now depleting their capital to fund their income. This is not sustainable.”
He says although you can’t control the markets, being able to change your drawdown amount is the one thing you can control. “The adversity presented by Covid-19 does require living annuitants to be frugal and review their budgets and ensure they save where possible.”
Gouws says short-term sacrifices can have a meaningful impact on the longevity of a living annuity.
“From data collected by the Association for Savings and Investment South Africa in 2018, we know that living annuitants draw an average income of approximately 6.5% of the value of their annuity. If, through careful budgeting, annuitants can reduce their drawdown to 5.5%, they can potentially ‘buy’ another four years of income or more.
“The most powerful tool living annuitants have at hand is their own budgets. They have no control over the markets or the shorter-term volatility, which we will continue to see. They can, however, control their expenditure and reduce their current drawdown, which can buy them a few additional years income later in retirement,” Gouws says.
A word of warning, however, on your underlying investments: you may be worried about further losses and be tempted to switch out of, say, a multi-asset fund into a safer money market fund. Gouws warns against making such a switch out of “fear”.
He recommends that you consult a professional financial planner before making any such changes to the underlying investments.