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Treasury grants relief on living annuities: What does this mean for you

By Jenny Gordon Time of article published Jun 2, 2020

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On 1 June 2020 the Government Gazette was published allowing changes to the drawdown percentage on living annuities to between 0.5% and 20% of the asset value for a period of 4 months, to 30 September 2020.

ANALYSIS: 

During this period all living annuitants will be able to change their annuity drawdowns to an amount that is not less than 0.5% and not greater than 20% of the value of the annuity assets. 

Individuals will be allowed to adjust their drawdown rates at any time during this period, without having to wait for contract anniversary (irrespective of whether or not the contract anniversary date falls within the said period). Any election made will only be applicable for “the relief period”. 

At the end of “the relief period”, from 1 October 2020 any election made during this period will cease and the draw down rates will automatically revert to the rates applicable before the said adjustment.

If, during “the relief period”, a contract anniversary occurs and “the relief period” percentage rate has been selected, the annuitant must also select a drawdown percentage 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% -17.5%; or 5% - 20% for pre- 21 February 2007 annuities where applicable. 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

INTERPRETATION:  

Three situations are envisaged:

1.     Living annuities which do not have a contract anniversary between 1 June 2020 and 30 September 2020

  • Individuals will be allowed to increase or decrease their drawdown rate to between 0.5% and 20% of the asset value during the relief period.
  • The asset value referred to will be determined at the last anniversary date.
  • On 1 October 2020, the drawdown rate will automatically revert to the drawdown percentage elected at last anniversary date, before the relief period election.

Example:

(In all examples I am assuming the capital value remains at R2 million to simplify calculations and illustrate the point)

Annual draw down (increase): If the drawdown percentage elected on last anniversary date was 17,5% and the asset value was R2 million, the Rand amount = R350 000. If the annuitant elects to increase the drawdown percentage to 20% the maximum draw down is R400 000. The annuitant may elect an additional payment of R50 000 during the relief period. No further amounts may be paid until the next anniversary date.

Annual draw down (decrease) If the drawdown percentage elected on last anniversary date was 2,5% and the asset value was R2 million, the Rand amount = R50 000. The annual draw down was R 50 000.This amount has already been paid. No further action.

or

Monthly draw down: (increase) If the draw down percentage elected on last anniversary date was 17,5% and the asset value was R2 million, the Rand amount = R350 000 payable in monthly payments of R29 166. If the annuitant elects to increase the drawdown percentage to 20%, the maximum draw down is R400 000 payable in monthly instalments of R 33 333. An amount of R33 333 may be paid for 4 months. On 1 October 2020, the drawdown will automatically revert to R29 166.

or

Monthly draw down (decrease) If the drawdown percentage elected on previous anniversary date was 2,5% and the asset value was R2 million, the Rand amount =R50 000. The monthly payment is R 4 166. If the annuitant elects to decrease the drawdown percentage to 0.5% the minimum draw down is R 10 000 and the monthly payment is R 833. With effect from 1 October 2020, the monthly drawdown will revert to R4 166, ie: 2.5%.

Note: the same principle applies for bi-annual and quarterly frequencies.

2. Living annuities which have a policy anniversary between 1 June 2020 and 30 September 2020.

  • Individuals will be allowed to increase or decrease their drawdown rate to between 0.5% and 20% of the asset value during the relief period.
  • The asset value referred to will always be determined at last anniversary date.
  • On anniversary date, the annuitant must elect a drawdown percentage between 2.5% and 17,5%.(or between 5% and 20% for contracts commencing before1 February 2007)
  •  In addition, for the relief period, the annuitant may elect a rate between 0.5% and 20%.
  • On 1 October 2020, the drawdown rate will automatically revert to the GN 290 drawdown percentage elected at last anniversary date.

Example:

Monthly Draw Down: (increase). On new policy anniversary, a draw down for the next policy year must be elected. Assuming this is 17,5%, and the asset value is R2million, the Rand amount = R350 000 payable in monthly payment of R29 166.

The annuitant may also elect to increase the drawdown percentage to 20% for the relief period. The maximum draw down is R400 000 payable in monthly instalments of R 33 333. An amount of R33 333 may be paid for the relief period.

On 1 October 2020, the drawdown will automatically change to R29 166.

or

Monthly draw down (decrease). On new policy anniversary, a draw down for the next policy year must be elected. Assuming this is 2,5%, and the asset value is R2 million, the Rand amount = R50 000 payable in monthly payment of R 4 166.

The annuitant may also elect to decrease the draw down percentage to 0.5% during the relief period.

On 1 October 2020, the drawdown will automatically revert to R4166 ie: 2.5%.

Annual election: (increase or decrease)

The annuitant may elect an annual draw down of between 0.5% to 20%. No further draw down will apply until the next policy anniversary.

3. New Living annuity contracts with inception dates between 1 June 2020 and 30 September 2020.

  • At inception the annuitant must elect a drawdown percentage of between 2,5% and 17,5% until next anniversary date.
  • In addition, the annuitant may elect a draw down rate of between 0,5% and 20% of the asset value for the period until 30 September 2020.
  • On 1 October 2020 the drawdown rate will automatically change to the drawdown percentage between 2,5% and 17,5% until next anniversary date.
  • The asset value referred to will always be determined at the inception date.

Monthly Draw Down: (increase). If the living annuity start date is 1 June 2020 and the drawdown percentage elected at inception is 17,5% and the asset value was R 2 million, the Rand amount = R350 000 payable in monthly payments of R29 166. If the annuitant also elects to increase the drawdown percentage to 20%, for the remainder of the relief period, the maximum drawdown amount is R400 000 payable in monthly instalments of R33 333 for the relief period. On 1 October 2020, the drawdown will automatically change to R29 166.

Monthly draw down (decrease) If the anniversary start date is 1 June 2020, the annuitant must elect a drawdown rate of between 2,5% and 17,5%. If the asset value at anniversary date is R2 million, and the drawdown percentage is 2,5% the Rand amount = R50 000. The monthly payment is R 4 166. If the annuitant also elects to decrease the drawdown percentage to 0.5% during the relief period, the minimum drawdown is R 10 000 and the monthly payment is R 833. With effect from 1 October 2020, the monthly drawdown will revert to R4 166, ie: 2.5%.

Annual election: (increase or decrease). The annuitant may elect an annual draw down of between 0.5% to 20%. No further draw down will apply until the next policy anniversary.

Jenny Gordon is the Head Technical Advice Investments, Product and Enablement at Alexander Forbes

PERSONAL FINANCE 

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