Cape Town - The average income drawdown rate for living annuities continued its slow yet steady decline in 2015, edging a little closer to the recommended 5% of capital.
A living annuity is defined as a special type of compulsory purchase annuity that does not guarantee a regular income. Capital preservation is dependent on the performance of the underlying investments and a reasonable income drawdown level.
The 2015 Living Annuities Survey released by the Association for Savings and Investment South Africa (Asisa) this week shows that last year living annuity policyholders withdrew on average 6.44% of their capital as income.
Peter Dempsey, deputy CEO of Asisa, comments that while living annuity policyholders must draw a regular income of between 2.5% and 17.5% of the value of the assets, the majority of pensioners risk eroding their capital by drawing more than 5% as income.
“This is why we get excited when we see the average drawdown rate decreasing every year, even if it is marginal,” says Dempsey.
When Asisa started collecting consolidated statistics on South Africa’s living annuity book in 2011 the average drawdown level was 6.99%. This means that over the past five years there has been a decline of just over 0.5%.
“Given the rising cost of living, which impacts most severely on those no longer in a position to generate an additional income, we are encouraged that pensioners on average have not resorted to increasing their drawdown rates.”
Living annuities in numbers
At the end of 2015, South Africans had R331.6bn (R278.9bn in 2014) of their retirement savings invested in 410 898 living annuities (360 894 in 2014). In 2015 living annuities attracted new inflows of R58bn compared to R46.5bn in 2014.
Selecting income drawdown levels to preserve capital
Dempsey says income drawdown levels must be reviewed annually to ensure that they do not exceed expected portfolio returns.
“When the percentage of income drawn exceeds the returns of the investment portfolio supporting the living annuity, the capital base will be eroded over time,” says Dempsey.
Dempsey recommends, therefore, that a sustainable drawdown level is selected with the help of a trusted financial adviser who will take into consideration factors such as income needs, the composition of the underlying investment portfolio as well as the performance of underlying assets.
He adds that policyholders who are assisted by a financial adviser generally select lower levels of income since they better understand the long-term implications.
Living annuity policyholders are allowed to review their drawdown rates once a year on the anniversary date of the policy. By law living annuity policyholders must draw a regular income of between 2.5% and 17.5% of the investment value of the assets if the living annuity policy was bought on or after 21 February 2007.
Policyholders who bought their living annuities before this date are still allowed to draw income at the old levels of between 5% and 20% provided no changes are made to the selected income levels.
Unlike retirement funds, living annuities are not legally required to adhere to prudent investment guidelines as detailed in Regulation 28 of the Pension Funds Act. However, Asisa strongly recommends that policyholders take these guidelines into consideration when compiling their living annuity portfolios.
Dempsey says while the 2015 Living Annuities Survey shows that there has been quite a jump in living annuity policies that do not apply the prudent asset composition guidelines, this was in all likelihood caused by the impact of the depreciation of the rand on the offshore exposure of portfolios.
In 2015 just over one third (33.59%) of living annuity policies did not apply the prudential investment guidelines compared to 23.95% in 2014.