Market crisis: the plight of pensioners

By Martin Hesse Time of article published Mar 23, 2020

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Pensioners in defined-benefit funds or who have life annuities, in which their income is guaranteed, may be breathing easily at this time. However, a large portion of South Africa’s pensioners are drawing their income from market-related living annuities, which have been severely affected by the market chaos.

In consultation with a professional planner, living annuitants need to reduce their income (in the form of withdrawals, or drawdowns) to preserve their wealth.

Rick Briers-Danks, a Certified Financial Planner (CFP) professional at Veritas Wealth in Cape Town, says: “The one way to preserve your capital in your living annuity is to reduce your drawdown. We believe you should at the outset have set your drawdown at no more than 5% of the capital value and importantly set it as a rand value. This way, on the annual review date, you check the rand value as a percentage against the capital. In times when markets are under pressure and capital reduces, we would look to cut the drawdown as a rand value to stay in line with the 5%. 

“This, of course, is easier said than done, as clients have become accustomed to a certain income level.”    

Warren Ingram, CFP and director of Galileo Capital, says retirees should consider the asset mix within their living annuities. “It is important to have the right combination of cash, bonds, property and shares within the living annuity. After these big stock market drops, living annuities might be under-invested in shares. If you maintain the right combination of assets, you will limit the impact of big market drops while also participating in the inevitable recovery. Those retirees who are holding too much cash are not going to benefit when the stock markets recover.”


Craig Gradidge, CFP and executive director investment and retirement planning specialist at Gradidge Mahura Investments, says retirees are the company’s main concern at the moment. 

“The current market volatility should not be an issue for growth investors looking to build up capital over the long term. Retirees, especially those invested in living annuities are the most vulnerable in these markets. They draw down a percentage of their capital as income. A prolonged period of market weakness is a threat to the long-term sustainability of their income,” he says.

“Consider an investor who invested R2m in a living annuity in 2017 and is drawing 7.5% income. That works out to R12 500 per month income. Assume her portfolio returned the same as the average multi-asset medium-equity fund. What would her living annuity look like today?








R2 000 000

 R2 021 800

 R1 902 629

 R1 916 171

 R1 677 533

Income drawdown






Monthly income

R12 500

R13 250

R14 045

R14 888

R14 888

Annual income

R150 000

R159 000

R168 540

R178 652

R178 652

Return of Multi-asset Med  






“The recent market movement has blown her drawdown rate to a level where she is unlikely to recover if markets remain weak for an extended period. Without changing her income her drawdown rate has gone from a high 9.3% to 10.6%. When she invested, her income was expected to reduce in real terms after 13 years. Due to recent market movements, her income will now start to reduce in less than six years. An extended period of market weakness could permanently decimate her retirement plan, and she will experience permanent income decline in as little as four years,” Gradidge says.

The only variable retirees have control over is how much income they draw down, he says. “To manage this as tightly as possible, they need to get into the discipline of running their finances with a budget. Strict budget management and control can assist a great deal from a retirement planning perspective.

“From a product perspective they should investigate how much income they can earn on a guaranteed annuity. We have been blending guaranteed income with living annuities for clients over the past year. In some instances they earn more from the guaranteed annuity than they need. This helps reduce anxiety around long term-income sustainability.”

Gradidge says a key issue for many retirees to overcome is that of wanting to leave money to their dependents when they die. “This automatically steers them to living annuities, and puts their retirement at risk at times like these. More retirees should consider guaranteed annuities (life annuities)  – or a blend of living and guaranteed annuities.”

He says there are also structured products and enhanced-income products that retirees can consider with their discretionary savings.


Another group of people who are vulnerable are those within two or three years of retiring who may have suddenly seen a sudden large drop in their accumulated savings and who don’t have the luxury of a long-term investment horizon to recoup their losses.

Briers-Danks has the following advice: “We would revisit the client’s financial plan and, depending on their specific circumstances, would discuss options and explore possibilities.

“We would start conversations about things like:

* Potentially delaying retirement, if that is possible.

* If not possible, retiring in three years but starting to work on other income-generating opportunities to supplement income in three years’ time.

* Reducing expenses where possible.

* Delaying the purchase of capital items where possible.

“Most importantly, clients must be fully engaged in the process. It is their financial plan and they may have to take steps that they hadn’t considered for the plan to stay on track.”

Ingram says It is important to remember that retirement is not the end. “Most people will live for 20 to 30 years after they retire and will probably live through three big market crashes in their retirement. It is very likely that markets will recover within the next three years and therefore it makes sense to maintain a good allocation to shares, even when markets are rocky. My biggest fear for retirees is not volatile markets; it is the impact of inflation. Shares are the best antidote for inflation,” he says.


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