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Can I transfer my funds out of a loss-making annuity?

Changing investment strategies based solely on market performance is not advised, especially in retirement.

I have invested in five funds in the Allan Gray platform. By my calculations, I’ve experienced losses of over R40 000 in Q1 of 2018 and about R87 000 in Q4 2018. I’ve asked all the different funds to explain the causes of negative trends and received lengthy explanations that, in the end, don’t assist me in making a decision whether to leave the funds altogether. The funds are part of my living annuity that Allan Gray pays me on a monthly basis. Currently, I draw 6.5%.

My question is: can I change from the living annuity and transfer the amounts to other types of investments such as saving accounts and gold coins, among others?

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Living annuities as a retirement income vehicle aren’t often fully understood by investors. Too many clients end up in a living annuity, relatively unadvised.

A living annuity is a retirement income product with its investment value linked to financial markets. As a result, the investment value fluctuates constantly. Investors choosing living annuities are in essence ‘self-insuring’ their retirement provision. They are taking on all of the investment/market risk, together with longevity risk (that they or their spouse might live to, for example, age 100).

Living annuities are regulated by the Long-term Insurance Act. Once an investor has opted for a living annuity, it can only be converted to two other products (also Long-Term Insurance Act products):

  1. A conventional guaranteed annuity, or
  2. A hybrid annuity.

I believe these post-retirement products could be used in conjunction for a dynamic ‘post-retirement’ strategy as opposed to only choosing one (also see: Hybrid living annuities: the Boeing of retirement?).

Trustees of pension funds are now required to propose a default post-retirement income option. I would suggest obtaining proper financial advice from someone who can point out the differences between an ‘in-fund’ and the independent retirement income options mentioned before making a decision.

Living annuity retirement option – ‘best practice’

Retiring with 25 to 30 years of retirement ahead of you requires a high degree of caution when determining your income drawdown.

In this low-return environment, avoid exceeding a 4% income drawdown on your capital per year.

Many annuitants who started off drawing 5% in 2015 are now drawing in excess of 6.5% to 7.5% due to a lack of growth in financial markets.

Understand the engine

Investors should fully understand the underlying investment instruments in their living annuity. These financial instruments (such as equities, listed property, bonds and cash) are individually responsible for producing much-needed investment capital growth and income for withdrawal. Investors also need to understand what percentage of their investment is at risk and how substantial those investment risks are.

I find that very few investors are aware that 100% equity exposure can drop as much as 30% to 40% during extreme market conditions. Understanding the growth potential and potential risks inherent in your investment portfolio helps to align your expectations with reality.

Investors should expect a reduction in their living annuity investment value when markets are down. For example, if local equity markets are down, say 10%, an investment with a 70% equity exposure could easily see a 5% reduction, before any income drawings.

Drawdown

A 6.5% income drawdown on a living annuity is expected to be unsustainable and will cause most living annuities to deteriorate in value (at least relative to inflation). Investors who are serious about the success of a living annuity over a 30-year period will bring down that percentage immediately. Do not maintain a constant drawdown percentage during those good years of high double-digit returns. Only adjust your drawdown amount by inflation (if necessary) and preserve any investment returns above inflation for the years of low returns.

Investment structure

Most studies have shown that taking on more risk (in other words, appropriate levels of equity) after retirement delivers superior returns in the long run, when compared with an overly conservative approach. Personally, I still suggest the ‘bucket approach’ during post-retirement.

The bucket approach aims to align your portfolio layout with your short-, medium- and long-term financial objectives.

Cash can at times play a larger role in the portfolio due to a decrease in investment opportunity in shares/risk assets. Moving in and out of cash when market volatility increases can be foolish and risky.

The only time I will vary from the bucket approach is when it is clear that an investor has more than sufficient retirement provision (drawing income at, say, 3% per annum or less).

Changing investment strategies based solely on market performance (especially when markets are down) is not advised, especially in retirement. Any retiree needs to carefully seek quality financial advice from an investment professional. Subsequently they need to trust that adviser to successfully manage their emotions/investments.

In response to the reader’s comments on the performance of the Allan Gray funds, Shaun Duddy, product development manager at Allan Gray, provides the following comment:

“It is important to remember that a living annuity is an investment product that comes with regulated rules and restrictions that dictate how the product works. These are the same for all living annuity products regardless of product provider. The investment return you receive in a living annuity comes from your choice of underlying unit trusts. When you invest in the Allan Gray Living Annuity, you can choose a selection of unit trusts from the options available on our investment platform. These are unit trusts managed by Allan Gray or by other investment managers. Since you do not specify which unit trusts you have as your underlying investments, it is difficult to comment on the investment returns and/or track records of your chosen managers.

“In saying that, the last five years have been particularly difficult for equity investors, with the market delivering returns below that of cash. If you have chosen unit trusts with a large exposure to equities, you may have experienced poor returns. Many investors are switching to the perceived safety of money market and cash instruments to escape the volatility of equities. We would guard against this approach: switching out at the bottom of the market comes with a big risk of locking in losses.

“While one cannot be sure what lies ahead, history suggests that there is a higher probability of a positive rather than a negative outcome for equity investors who have a long-term investment horizon.

“What is most important is to ensure that the underlying investments you have chosen for your living annuity are appropriate for your objective of providing an income for the rest of your life. You need to have sufficient exposure to growth assets, like equities and property, that are able to provide a high enough level of return over the long term to sustain your living annuity income. At the same time, you need to have some balance in your portfolio to provide cushioning against the ups and downs expected from those growth assets.

“If your current selection of unit trusts has been carefully chosen to meet your objectives, and your managers have demonstrated an ability to produce quality outcomes over the longer term, you should think carefully about switching based on short-term performance.”

  

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Great article to see the real facts of costs visit Infund Solutions Facebook page and look at the world class Living Annuity’s that the TELKOM RETIREMENT FUND and other funds has build for its members, see the cost comparison done by the Telkom Ret fund. Also see on this page Warren Buffett”s comment “Perfomance comes, performance goes. Fees never falter.”

Members that left/retired already out of their pension funds as employees should ask the fund they used to belong to for a comparison if their funds offer an off balance sheet Living Annuity, or contact Infund Solutions to do a comparison on costs.

It is clear to me that this person is not up to scratch how the different asset classes work in order to give income. I am an investor with Allan Gray for more than 20 years, but in my opinion they do not have any product that is suitable for a pensioner to draw an income if you look at the composition of Balanced, Optimal and Stable Fund.

What I find a bit disconcerting about Shaun’s response is that nowhere is there an indication by Allan Gray that they made contact with their client since 2015 to make any recommendations as to a way forward in terms of paring back the customers monthly draw down, the ramifications of such a substantiate draw down (6.5%), a reevaluation of fees aligned with performance, and consideration of switching funds from the 5 existing funds to other funds. Also I can’t see any indication in the article that says you may only change your draw down percentage once a year – markets can turn quicker up/down in less than 12 months. Also there is no consideration of investing in some ETF within a portfolio of funds.
Get the distinct impression that this word “advisory” is a bit like a plague AG can make recommendations for consideration by the client with the express understanding that it is the clients call and instruction to go into a given fund/s

Not defending AG, but they explicitly state they dont provide financial advice, so WHY do you expect them to contact the client?

There is often a confusion between RA Products which allow a person, especially with high income and therefore high income tax rate which allow you to defer some taxation until after you retire and post retirement annuity whether fixed or living.

RA Products so far have to be regulation 28 compliant.

When you retire, if your retirement funds go into a living annuity you cannot normally draw the balance of your investments and move them into other types of investments.

They can, however, if I am not mistaken, between regulation 28 compliant underlying Unit Trust and another which is not necessarily regulation 28 compliant. Doing so within your existing platform should be relatively simple.

It would also be possible to switch funds between companies, say Allan Gray and Coronation or SANLAM, as long as it is into another Living Annuity, or, a fixed annuity.

Usually it would not be possible to switch back from a fixed annuity to a living annuity.

RA’s are usually good vehicle to save towards retirement, but, especially the Insurance ones usually tie you up for lengthy periods and would often penalise you if you need to stop or reduce your contributions.

The reputable Unit Trust managers may allow you to contribute to RA’s or stop when you can or wish but the yearly amount or percentage you can enjoy tax benefits on is limited.

The problem with all annuities is, however, that after you retire you are taxed in full on your drawings as income, and may not draw more than 17.5% or less than 2.5% of your capital per annum.

Depending on the source of your underlying retirement investment, if, for example you sell an asset such as an investment, a business or a house, it would often be more beneficial and flexible to invest in straight forward Unit Trusts, as if you have small or no other regular income and keep your drawings frugal enough, you may not reach the income tax threshold on drawings from annuities of similar amounts that would attract tax regardless of how badly the underlying investment is faring.

Investing with the big shots is indeed a financial suicide. Your money work for them and not you. It could have been worse if you had invested with Oldmutual financial services. Your losses would have been in geometrical progression.
I will suggest you explore provider that will make your money work for you.
All this market volatilities is just a prime excuses sold to us by the service provider. The real reason why our investments don’t grow is the unexplainable fees being deducted by the provider. They built this fleecing fee into your investment in such a way that you will never suspect them until you have spent an average of 5 yrs invested.
The most guilty company is old Mutual financial services. They are good for nothing. They live on your investments. They will never allow you to reap the reward of your labour. Flee from them before they fleece you to bankruptcy and poverty. I have a bitter experience with them. Now I am free indeed from their shackles.

You are so right. If one take the situation Oct/Nov/Dec 2019, the providers did absolutely nothing. They have no shin in the game and they only sit back and say ‘it is the markets’ watching how you get poorer by the day. By end of Oct they could have said – lets move all your investments into cash and then buy back when the situation has changed. I am not impressed with providers at all.

Likewise with Momentum. They are not interested in the well being of their clients.

And to top these losses off this person is paying AG 3% or minimum a of 2% to loose them money?

As LA,s are regulated by the Long term Insurance act , then the Vital question is : Would a LA be subject to the Govt intention (and certainty) to introduce prescribed assets into Pension fund investments ??
My take is that as an Insurance product it will remain unaffected , but I,m not sure??
if it does apply , I,ll take 17,5% p.a. , pay the tax and offshore the lot !!

The key with living annuities is to compare yearly with a guaranteed annuity from an insurer. These become less costly as the insured ages.

Regulation 28 does not apply to living annuities so if the time horizon is lengthy, better overseas diversification is possible.

If you want to manage a living annuity you need to be aware of various asset class performance and risks. The AG or other platform is fine to give access to the different types of funds.

A hybrid annuity is advisable, whilst a maximum withdrawal rate of 4% is prudent.

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