Col 10: Watch your living annuity like a hawk

Most people drawing a pension through a living annuity simply do not seem to realise that they could easily be facing running out of money later in their retirement. Drawdown more than 5% from a living annuity and you are very likely to see a dropping standard of living in the future.

By Bruce Cameron
Co-author of The Ultimate guide to Retirement in South Africa

Keep your pension drawdown to less than five percent of your retirement

The Association for Savings and Investment South Africa (Asisa) recently released a five-year update on the living annuities held its member companies based on consolidated statistics gathered in line with the Asisa Standard on Living Annuities showing people on average are drawing down more than 6% of their retirement capital. (An Asisa ‘standard” is telling product providers how to behave)
In a press release Asisa makes the claim that ‘a living annuity model proves robust in volatile times’. But based on the figures provided by Asisa and other researchers it would seem to indicate the opposite is true.

Firstly some background. Asisa paused the publication of living annuity drawdown statistics after the release of the 2017 statistics ‘to avoid misinterpretation’. The Asisa reason was the statistics are aggregated at industry level and do not contain enough granular data to assess whether individual living annuity policyholders are applying prudent drawdown levels or are at risk of eroding their purchasing power.

Asisa has now reconsidered its position on publishing the ‘limited’ living annuity statistics ‘because there is value in providing stakeholders with insight into the health of the overall system and as a benchmark to evaluate outcomes and consumer choices at a more granular level’.

What is still wrong with the Asisa statistics?

Some of the initial and main criticisms of the Asisa statistics are:

• The average rate of annual pension drawdown must be between 2,5% and 17.5% of your residual annual capital. A lot of research has shown that in most cases no drawdown rate should actually exceed 5% if you want to remain financially secure for life – and that could mean living to 100-years plus. The bad news is that average drawdown is between 6% and 7%. And remember this is the average. Some will be withdrawing less but more will already be in excess of an unsustainable 10%.

This is supported by research done by retirement specialist, Just Retirement which says the drawdown rates are closer to 8,5% based on its figures; and, Alexforbes, the biggest retirement fund institution, found the initial average drawdown rate by people it surveyed was 6,42%.

• The Asisa argument that many people have more than one living annuity as a reason for the higher drawdown does not make sense. It is far more likely that people receiving low Rand pensions are more likely to be drawing more than five percent, while people on high Rand pensions are more likely to drawing less than 5%. This is backed up by AlexForbes which says 77% of pensions have retirement capital of less than R1,5 million; and, nearly 25% have retirement capital of less than R600 000 and they withdraw more than 10%.

• The one figure that Asisa, based on its own arguments, could give, is to tell us how many living annuities have reached the ‘point of ruin’. This is when the pensions reach the maximum drawdown of 17,5 percent, which after inflation, means that a pensioner will draw less and less every month after that point facing financial ruin.

The Asisa table advising on drawdown rates and when you could hit your ‘point of ruin’ says:

Drawdown rate	Annual Investment Return Before Inflation, But After All Fees
	2,5%	5%	7,5%	10%	12,5%
2,5%	21 years	30 years	50+ years	50+ years	50+ years
5%	11 years	14 years	19 years	33 years	50+ years
7,5%	6 years	8 years	10 years	13 years	22 years
10%	4 years	5 years	6 years	7 years	9 years
12,5%	2 years	3 years	3 years	4 years	5 years
15%	1 year	1 year	2 years	2 years	2 years
17,5%	1 year	1 year	1 year	1 year	1 year

The Financial Sector Conduct Authority recommends in a draft table the following average pension drawdown:

Age	Drawdown
55	4%
60	4,5%
65	5%
70	5%
75	5,5%
80	6%
85	7%

 

What are the average initial pension drawdown rates?

This is the latest Asisa five-year table on average living annuity drawdowns:

Period	Average Living Annuity Drawdown Rates*	New inflows	Number of Living Annuities**	Total Assets Under Management
2018	6.53%	R50.4 billion	464 430	R424.8 billion
2019	6.72%	R63.9 billion	491 286	R486.1 billion
2020	6.71%	R74.2 billion	516 989	R507.2 billion
2021	6.88%	R85.6 billion	515 234	R614.1 billion
2022	6.66%	R67.1 billion	527 038	R625.9 billion

* The average income drawdown level is weighted by fund size (the total value of the drawdowns against the total value of the living annuity book).

** The number of living annuities does not imply the same number of policyholders. It is not uncommon for policyholders to have more than one living annuity.

Some other retirement facts

Asisa says South African retirees had R625.9 billion of their retirement savings invested in living annuities at the end of 2022, which marks an increase of 47.3% from the R424.8 billion invested in living annuities at the end of 2018. The number of living annuity policies grew by 13.5% over the same period to 527 038 at the end of 2022. In the five years since ASISA published the 2017 living annuity statistics, the average living annuity drawdown rate has consistently stayed below 7%.

Jaco van Tonder, deputy chair of the ASISA Marketing and Distribution Board Committee, says a review of the living annuity statistics from 2018 to 2022, which covers a particularly tumultuous four years for the global economy due to the Covid-19 pandemic, confirms the ‘robustness of the living annuity model as the average drawdown rate remained stable over this period’. In 2011, the average drawdown rate was 6.99%, the highest ever recorded. Van Tonder says that the drawdown rate never moved back to those levels, despite challenging market conditions.

In 2018, the average drawdown rate was 6.53%. It increased slightly to 6.72% in 2019 and adjusted to 6.71% in 2020. In 2021, the year in which South Africans suffered the biggest economic aftershocks of the Covid-19 lockdowns, the average drawdown rate moved up to 6.88%. By the end of 2022, the average drawdown rate had dropped back down to 6.66%.

The problem however is that the initial average drawdown is simply too high and many people will face the ‘point of ruin’.

But Van Tonder does concede that when the percentage of income drawn exceeds the real returns of the investment portfolio supporting the living annuity, the capital base will be eroded over time.

He warns that annual drawdown rates of 4% to 5% in the first decade of retirement and below 8% in the later retirement years are generally considered prudent, providing annuitants with a high probability of preserving their purchasing power for their lifetime. It is therefore encouraging that in 2022, the 2.5% to 5% rate made up the biggest income band by number of policies (159 147), followed by 5% to 7.5% (98 942 policies).

What is a living annuity?

A living annuity is a compulsory purchase annuity that does not guarantee a regular income. The pension income (or annuity amount) is dependent on the performance of the underlying investments. Three key factors determine how long the capital will be able to produce a regular income:

• The level of income selected between 2,5% and 17,5%;

• Performance of selected investments; and

• The lifespan of the annuitant.

 

There is a lot more detail on this in the book, The Ultimate Guide to Retirement in South Africa. For more information on how to purchase the book go to Buy Now on our website  www.retirementplanning.co.za

Related Topics:

https://retirementplanning.co.za/tracker-funds-are-important-for-retirement/

https://retirementplanning.co.za/pensioners-best-shorter-term-investments/

https://retirementplanning.co.za/dementia-requires-special-retirement-planning/

https://retirementplanning.co.za/scary-pension-fund-withdrawals/

https://retirementplanning.co.za/unpacking-investment-linked-living-annuities/

https://retirementplanning.co.za/advice-living-annuities/

https://retirementplanning.co.za/living-or-guaranteed-annuities-2/

https://retirementplanning.co.za/hybrid-annuities-retirement-fund-defaults-may-be-the-cheaper-options/

https://retirementplanning.co.za/hybrid-annuities-some-of-the-choices/