MONEY CLINIC: Is it worth investing in a living annuity during the time of Covid-19?

Close up of unrecognizable woman using calculator while going through bills and home finances.
Close up of unrecognizable woman using calculator while going through bills and home finances.

A Fin24 reader heading into retirement seeks the opinion of an expert on investing during the uncertainty of Covid-19.

He writes:

What is your opinion regarding a living annuity in the circumstances in which we find ourselves? I am retiring at the end of this month. 

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

Markets have sold off quite aggressively over the past quarter. The Reserve Bank also cut interest rates by 200bps in a very short amount of time, making cash not as attractive as it used to be. The world is an uncertain place at the moment, and facing retirement is daunting and uncomfortable for most people. 

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 a yield component. We are fortunate in South Africa that SA 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, for example, 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 to assist you in making an informed decision when it comes to your personal finances.

Compiled by Allison Jeftha. 

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