In line with the President’s address to the nation on April 21, the Minister of Finance included relief to living annuitants in the second set of measures announced on April 23 to assist individuals through the pandemic.
Living annuitants currently have the option to draw an annual income of between 2.5% and 17.5% of the value of their living annuity as an income or pension.
This income can be paid monthly, quarterly or annually and the living annuitant can review their income drawdown annually on the anniversary or inception date of the living annuity.
Through the relief measures announced individuals who receive income from a living annuity can change their income drawdown as their situation demands. This can be done immediately, instead of waiting until the next anniversary date. This is a temporary measure to assist individuals who either need cash flow immediately or who do not want to be forced to sell after their investments have underperformed. These measures are particularly useful for investors who do not want to risk the longevity or sustainability of their living annuity by “eating into their capital” as a result of the volatility we have seen in markets. Most living annuity investors are invested in multi asset funds which have exposure to some growth assets, this is required to ensure the sustainability of their income. These funds, on average have decreased by anything from 5% to 15% over the first quarter of 2020.
Even though the numbers vary, and are extremely erratic, the hard-hitting reality is that most living annuitants have seen a significant reduction in the values of their annuities and are now “eating into their capital” to fund their income. This is not sustainable, and as they erode capital they are eating into their future income.
Even though the changes in the level of drawdowns is welcome, the ability to change the level of income before the anniversary date is more significant. This is the one tool living annuity investors have control over in ensuring the sustainability of their income.
The adversity presented by Covid-19 does require living annuitants to be frugal and to review their budgets and ensure they save where possible. Some short-term sacrifices can have a meaningful impact on the longevity of a living annuity.
The Association for Savings and Investment SA no longer collects industry data on the average drawdown rate on living annuities, but from the previous data collected (2018) we know that living annuitants draw an average income of approximately 6.5%. If, through careful budgeting, living 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 that 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.
Wynand Gouws is a Wealth Manager at Gradidge Mahura investments.
PERSONAL FINANCE