MONEY
C O N T E N T PA R T NE R S H I P
CHANGE YOUR LIVING ANNUITY, NOT YOUR DRAWDOWN RATE BY JOHANN SWANEPOEL, PRODUCT ACTUARY, JUST SA
T
he relatively poor market
movements. And this does not
to re-invest, and you can maintain
returns over the last
require you to reduce your
discretion over the balance of the
five years, coupled with
drawdown rate.
assets to maximise the long-term
the devastating crash in March
A combination of market
capital growth to meet flexible
this year, has exposed the risks
factors caused long-term interest
financial needs or to leave a legacy
associated with standard living
rates on bonds to increase (and
to beneficiaries.
annuities where pensioners carry
is a rare opportunity not seen in
all of the investment and longevity
many other countries around the
do not allow you to split your living
risk on their own.
world). This is really good news for
annuity after retirement. So, in
As part of its response to
As it stands, current regulations
pensioners looking to secure an
order to make your retirement
the COVID-19 crisis, National
income for life. Life annuity rates
income more sustainable, you may
Treasury announced a change
improved significantly, which
want to consider the following:
in living annuity drawdown
meant a guaranteed retirement
• If you are already invested in a
restrictions where pensioners will
income was cheaper compared to
blended living annuity, consider
be allowed to temporarily adjust
before the market crash. Great –
increasing your allocation to
their drawdown rate to as low as
but you may be asking what that
the lifetime income portfolio
0.5% or as high as 20%, even if it
has to do with sustaining an
to secure a higher guaranteed
is not the anniversary date of the
income in a living annuity.
living annuity. Many commentators suggest
No guarantees are provided
income for life • Transferring your entire living
in a standard living annuity.
annuity to a blended living
living annuity investors do
The good news therefore only
annuity to access a lifetime
nothing in a tumultuous market,
really applies to living annuities
and there may be merit in that.
that have the ability to access
• Converting your entire living
Others suggest you reduce your
a guaranteed income within a
annuity to a guaranteed life
drawdown rate, which makes
single vehicle. And there are only a
annuity, especially if you are
sense on paper, but is not a possibility for most pensioners. Insights from Just’s retirement-focused study in 2019 revealed that two in five
handful available in the market – referred to as ‘blended’ living annuities. Recent research has proven that a
respondents said they cannot
combination of a living annuity
afford to lose any retirement fund
and a guaranteed income for
money before it seriously affects their retirement plans. But current market
life offers a more optimal solution than either on its own. A blended living
income portfolio
drawing at a rate higher than the recommended drawdown rates • Remaining in a standard living annuity and effectively selfinsuring against volatile markets and outliving your capital. The age-old investment advice is stay invested for the long term. But if your time horizon
conditions present a unique
annuity will allow you to
is shorter, you should also focus
opportunity to improve
maximise consumption
on additional options to secure a
the sustainability of your
by securing lifetime
sustainable long-term solution to
income in retirement
income to cover
protect yourself (even partially)
despite the recent market
essential expenses, or
from the next market crash. •
22
SILVER DIGEST // WINTER 2020
