MONEY CLINIC | My money is depleting. Can I transfer my living annuities to RSA Retail Bonds?

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A Fin24 reader, looking for ways to make the most of his money, seeks the help of an expert on how to invest his living annuities.

He writes:

Can I transfer all my living annuity investments to RSA Retail Savings Bonds for a period of five years, as presently my money is depleting rapidly based on where it's invested? As at June 2020, I can lock my investment at 8.5% per annum and get a tax relief on interest received, which amounts to R69 000 p.a. I am married in community of property. 

Debra Slabber, Business Development Manager at Morningstar Investment Management SA responds:

One of the many golden rules of investing is to diversify your assets or, more simply put - "don’t put all your eggs in one basket." By transferring all your Living Annuity assets into one single asset class is doing the exact opposite of diversifying. If you take this course of action, you would essentially be betting your life savings on only one horse. 

Let’s consider the pros and cons of RSA Retail Savings Bonds. The obvious pro is that RSA Retail Savings Bonds are offering an attractive return profile at the moment. The cons - withdrawals are usually only permitted after 12 months of investing but subject to a penalty fee. Further to that, investors take on liquidity risk, interest rate risk and counterparty risk when investing in an RSA Retail Savings Bond. As the product is required to be held to maturity, investors are not able to raise cash in the event of an emergency.

If interest rates increase, investors will lose out as they are locked in at the lower interest rate for the term of the investment. Although regarded as a lower risk investment option (due to it being backed by the government), there is a small chance of capital loss in the event of default by the SA government.

A far better strategy for a living annuity is to invest in a well-diversified portfolio - that has exposure to RSA Government bonds - with sufficient growth and income assets as well as enough offshore exposure.  

When thinking about your living annuity portfolio there are a couple of key factors to keep in mind. It is important to have a portfolio that:

  • On average, exhibits low levels of volatility. Living annuity clients can’t stomach large drawdowns in market downturns.
  • Has a healthy yield component. We are fortunate in South Africa that RSA Government bonds currently have some of the highest real yields on offer globally. 
  • Has a diversified stream of return drivers, including income assets (bonds and cash) and growth assets (S.A. equities) as well as a meaningful exposure to global assets (remember in a Living-Annuity portfolio, clients are not restricted to Regulation 28). 
  • Is cost-effective. 

The danger to investors at this point in the cycle, having experienced anaemic to no returns for the past five years, is to de-risk and move down the risk spectrum into cash and bonds. If your investment horizon and income requirements exceed three years, it is important to have exposure to growth assets, to ensure long term capital growth. 

The Morningstar Moderate Income Portfolio was built specifically with these factors in mind. From a valuation perspective, some asset classes are cheaper than what they were, and this makes a great entry point into markets. With the right portfolio composition, we are confident that clients can enjoy a reasonable income withdrawal without eroding capital over the long term. 

It is recommended that you speak to your financial adviser about your investment portfolio to assist you in making an informed decision when it comes to your personal finances. You can also speak to your adviser to find out how you can access the Morningstar Moderate Income Portfolio.

Questions may be edited for brevity and clarity.

  • Have a money problem that needs solving? Fin24 can help! Send your question to editor@fin24.com

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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