![]() Moneyweb recently ran an article warning that many living annuity policyholders could be left destitute, the story sparked significant debate. Such was the level of engagement, that the comment section generated in excess of 4 500 words of feedback, more than six times the word count of the original article. Important points were raised and constructive criticism offered, but perhaps the central message – that many living annuity policyholders could run out of money in an environment of lower returns and increasing longevity by drawing too aggressively – got lost in translation. It highlights just how complex the retirement debate is. Choosing an appropriate savings or investment vehicle or strategy for one individual, may be completely unsuitable for the next South African. In an effort to add nuance to the discussion (and to keep the debate going!) it is perhaps prudent to consider the broader context. 1. The traditional retirement concept is outdated The days when retirement referred to the day people turned 65, stopped working altogether and enjoyed their leisurely time while their former employer provided a pension for life are long gone. Although employers may still officially require employees to “retire” at 65, a lot of South Africans haven’t saved enough to support themselves after this date. This will require individuals to reinvent themselves to earn additional income to supplement their pensions. While an old-school retirement savings vehicle may still provide a basic income, it is unlikely that this will be enough to make ends meet. Against this background, good health may be the pensioner’s most valuable asset. This may allow him to work well into his 70s or 80s (even if only intermittently or for a few hours a week) and to avoid significant medical costs that can quickly erode even a sizeable savings pot. 2. No investment vehicle can undo a lifetime of poor savings behaviour Greater longevity has significantly increased the pressure on the traditional retirement system, particularly in an environment of low returns. Think about it: If someone diligently saved 15% of her salary for 30 years until age 65, and died five years after retirement (assuming she carried the investment and longevity risk), there was not a lot to worry about. But what if she lived to 95? That same 15% of 360 pay cheques (12 x 30) would now have to grow to compensate her for 100% (or 75% depending on what percentage of her last salary before retirement she aimed to replace) for another 360 retirement income cheques (after returns, fees and inflation were taken into account). In an environment where people often cash out their retirement savings when changing jobs and may only have 15% of 120 pay cheques (or less) saved by the time they reach 65 the numbers just don’t add up. Almost three in four respondents in the 2017 Sanlam Benchmark Survey indicated that they would reduce their standard of living in retirement. One in five said they “were in trouble” as they didn’t make any provision for retirement. Against a background where the vast majority of South Africans have not saved enough one has to realise that no living or guaranteed or with-profits annuity or whatever combination thereof can rectify a lifetime of poor savings behaviour, whether by choice or because circumstances necessitated it. It is an unfortunate reality that it is often pensioners, who in an effort to make ends meet, fall victim to investment scams with seemingly attractive returns. 3. Policyholders need to take the return environment and longevity into account Statistics released by the Association for Savings and Investment South Africa (Asisa), show that living annuity policyholders withdrew on average 6.62% of their capital as income in 2016, slightly more than a year earlier. Although one should consider that an average only provides a partial picture, this drawdown rate puts retirees at a significant risk of running out of money (assuming they had no other assets to provide a retirement income). The drawdown is of particular concern in a low return environment and as people are living longer. One of South Africa’s largest balanced funds delivered a return of 17.6% since its inception 18 years ago. With inflation of 5.8% over the period, living annuity policyholders in this fund could draw more than 10% per annum without seeing their capital eroding! Over the last three years, the fund delivered 8.1%, while inflation was 5.4%. Thus, even investors drawing 4% were dipping into their capital over the period. Unfortunately, the current situation may well put more pressure on the “sandwich generation” – individuals providing financial support to parents as well as children, thereby limiting their ability to save for their own retirement. According to Old Mutual’s Savings and Investment Monitor 2017, 37% of respondents said their children would look after them in their old age, while 33% said they would depend on government. 4. The debate doesn’t have to be either/or Much like the debate around active and passive investments, a discussion about living and guaranteed annuities often descends into a “which-one-is-better argument”. Although it is highly unlikely that living annuities are the most appropriate vehicle for the 90% of retirees who are apparently choosing these vehicles, there are (a smaller group of) retirees for whom it is the right choice. But it doesn’t have to be an either/or debate. While the fee structures around some living annuities are arguably inappropriate in the current environment, the challenges facing many policyholders are not inherently the result of product design, but rather a consequence of behaviour and a changing investment environment.While initial levels of income as well as inflationary pressures are of particular concern for pensioners, hybrid living annuities may offer the best of both worlds. A new generation of with-profit annuities that target inflation-related increases may also be an appropriate solution for those looking for a guaranteed income. To get a quote for your living annuity, please contact Kevin or Thato, email: [email protected] tel no: (011 658-1333) Source: Moneyweb
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