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Many living annuity policyholders could be left destitute

Slight increase in average drawdown rate masks true picture.

Many living annuity policyholders face a substantial risk of running out of money in retirement.

This comes amid a surge in longevity, floundering returns and an increase in average drawdown rates.

Statistics released by the Association for Savings and Investment South Africa (Asisa), show that living annuity policyholders withdrew on average 6.62% of their capital as income in 2016, slightly more than a year earlier.

Taryn Hirsch, senior policy advisor at Asisa, says the small increase came as a “pleasant surprise” given the steep rise in the cost of living.

“While we would have preferred to see the drawdown rate continue the small yet steady downward trend of the past five years, we have to accept that many pensioners are finding it increasingly difficult to maintain their standard of living without adjusting their drawdown rates upward,” Hirsch says.

The table below shows the average living annuity drawdown rates over time:

2011

2012

2013

2014

2015

2016

6.99%

6.77%

6.63%

6.59%

6.44%

6.62%

Source: Asisa

A traditional living annuity does not guarantee a regular income. Legislation allows retirees to draw between 2.5% and 17.5% per annum, but the retiree bears the investment risk, (i.e. that investment returns won’t be enough to compensate for drawdowns) and the longevity risk (that the money will dry up before the pensioner passes away).

The vast majority of South Africans choose living annuities at retirement, presumably because it allows them a higher initial income in retirement if they haven’t saved enough, because they can leave the remaining money to beneficiaries at death and because financial advisors often recommend these products due to on-going commissions.

While the average suggests that most retirees in living annuities are drawing too much, the average drawdown rate doesn’t tell the full story.

Peter Hewett, managing director of Hewett Wealth, says the statistics are somewhat skewed by a wealthier component of the population who are only drawing 2.5%. People with smaller retirement pots probably have a far higher drawdown rate than the average.

Another problem is that the average includes pensioners of all ages, adds Johann Swanepoel, product actuary at Just. One would expect people to increase their drawdown rates over their lifetime as they try to keep pace with inflation.

The average also takes new retirees into account. There is usually an increase in the number of new business written in living annuities over time. People that retired ten years ago may on average be drawing a completely different percentage, Swanepoel adds.

Risks

Generically speaking however, people are drawing too much and need to try to reduce their drawdown rates, Hewett says.

“You are going to find more and more people running out of money because of longevity – people are living a lot longer.”

In a blog post published last year, Just argued that a living annuity accident was “waiting to happen”.

Investment returns are expected to be muted going forward. In the aftermath of the global financial crisis stellar investment returns have allowed many retirees to maintain high drawdown rates that would otherwise have been unsustainable. In 2016, the JSE All Share Index returned 2.6% while inflation was 6.6%.

Hewett says there has been quite a significant shift in the market and South Africans should not expect the returns they have become accustomed to over the last ten years. Ten years ago, investors comfortably expected returns of 12% to 15% per annum.

“I think we are going to see generically a lower return environment… and people aren’t adjusting their lifestyles to accommodate that,” he says.

Swanepoel says while the average drawdown rate doesn’t convey the true story, the real retirement problem is much more significant than relatively high drawdown rates.

“People draw more than that [the average] and where they don’t have a lifetime income to protect them against outliving their assets they are forced to under consume and I think that is bad for a country that is known to have under provided for retirement. There are solutions which allow pensioners to draw more with less risk.”

Combining a lifetime income (with a guaranteed component) with a living annuity offer a balance between leaving money behind when pensioners die early and feeling secure when they live long, he says.

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Guaranteed annuity downsides are (a) you start with a lower income because the insurer needs to cover their risk and (b) if you die in the first few years after you retire, you cannot ‘leave’ anything for your children, the money simply disappears. Spousal benefits can be attached but again come with premiums. BUT you get guaranteed income no matter how long you live, a very important benefit. Living annuity downsides are described quite accurately in the article. Some product providers are coming out with ‘best of both’ solutions now, where you start in a full living annuity and gradually ‘phase in’ to a guaranteed annuity policy until you are eventually fully covered for longevity risk (most are structuring this phase-in over 8 to 12 years from retirement). A paper recently published in a peer reviewed actuarial journal, lends weighty creedance to this approach, showing compelling models and evidence that neither type of product on its own can give the same benefit as the structured combination which phases across over a period of years, giving the correct benefits at the right times. One of the best offerings available in South Africa that I’ve come across is the ForLife annuity product from Sygnia, which has the lowest fee and offers a ten year phase-over. Sanlam offers something similar but the fees are quite a bit higher.

Hi there,

I think a)’s reason is slightly different. You start lower because that is the correct level. Put differently, on an ILLA the income starts higher not because it safely can, but because it doesn’t adequately reflect the risks which should be allowed for.

The insurer doesn’t really cover the risk – the annuity pool does. All the insurer needs to cover, is the capital at risk, used to cover over and above the risks allowed for in the pool.

Another misconception: the insurer doesn’t “pocket” the pension, were you to die “early”. Too detailed a topic to cover here, but research the concept “mortality drag”. No one seems to ever mention it, in a debate on ILLA vs guaranteed annuity…

E. thanks for this clarity. As I see it you are 100% correct.

Way too much demonisation of insurers will probably lead to the impoverishment of some pensioners, as this article alludes to.

Unless one is a defined pension fund, a mix of With Profits/Inflation linked and LA seems to be the way to go.

The lower the income of retirement/fund values available to the pensioner, the more bias towards “guaranteed” annuity.

Having said that however, the political/economic prospects in SA are increasingly black. Will insurers be able to hold on long enough to pay long lived pensioners? Though not very tax efficient seems that a significant portion of one’s long term savings needs to be held outside any guvmund scheme.

The other option available is to covert a Living Annuity to a guaranteed annuity when the pensioner gets older. The older you are the better the rates on guaranteed annuities. You could get annuity rates of well over 10% when a person is over the age of 75. This would be a great idea for somebody who is in very good health and with a longer life expectancy. You could also covert to a guaranteed annuity once there is a rise in interest rates….sort of like ‘timing’ the guaranteed market.

That does not work when LA drawdowns are too high in the initial period of retirement.

This is at least partially the point of the article imho.

Proving this point. I recently saw a guaranteed annuity taken for a lady when she was 38 in 1999. It was money from a RA from her deceased husband. She receives R548 pm on a R 50298 annuity. This was while the prime rate was around 24%-25%.

my biggest fear on guaranteed annuities is that I’m taking risk that there is enough money left in the pool to last my lifetime as well as the insurer being upstanding for that time.
What happens if they run out of money, they can’t tax people more to make up the gap like the Government can for GEPF.

It’s a valid concern that the life insurer may go bust.

Note that if the insurer goes bust for any reason, annuitants will be in trouble – ie it could be for a reason completely unrelated to the guaranteed annuities it is offering.

On the other hand should only the annuity pool run out of money, the insurer could draw on its capital reserves to continue making payments. All insurers are required to set aside certain minimum amounts of capital in case things go wrong. Of course there is the risk that even this is exhausted.

In short, it’s important to look at things like the insurer’s capital levels and credit rating before entering into any policy (whether or not it’s a guaranteed annuity or life insurance). But even then, it’s still possible that the insurer goes bust.

The word annuity makes my eyes burn and my ears bleed.

Wont touch anything like that with a 100km stick.

“on going commissions” that is about the crux of it. I would propose that commissions to agents cease when a pensioner reaches 65. They need all they have, and the FA’s can sponge from the younger generation who are earning and can pay the coms.

On going commissions is killing the people. Insurance brokers are just like bank. They screw you till there is nothing left.Why can’t they adjust their commissions downwards, now the pensioners must adjust their living downwards. It is not that they are living large. At least most of them

Not really, it’s heavily legislated and most of the advisers I know take a token ongoing commission, normally under 0.5%.

If they are not paid this, why would they do the work of an annual review and if neccessary, portfolio rebalancing/switching?

0.5% p.a. commission is very high in my opinion. Let’s say a living annuitant is drawing R500 000 p.a. before tax and that they are drawing at the “traditional” 4% p.a. That means that the available capital is R12.5 million (500k ÷ 0.04).

Commission is usually charged on invested assets, which means that 0.5% p.a. equates to R62 500 p.a. in this case (12.5m x 0.005). Another way of stating it is seeing that 0.5% is 12.5% of the 4% drawdown. In other words, such an advisor is essentially getting 12.5% of every one of your annuity payments as a commission.

A more appropriate commission rate would probably be around 2% of the drawdown (i.e. (R500k x 2% = R10 000 p.a. in the example) which equates to 0.08% p.a. on invested assets (10k ÷ 12.5m)

Not that many actually do the annual financial review. But they still suck the commission off the poor pensioner nevertheless.

I think if one you can apply the FAIS Act retrospectively, a plethora of so-called financial adviser ”educated idiots” and fund managers at big funds, could be either jobless or in jails.

These fund managers were in charge of the funds and industry for years but did absolute nothing to improve /increase the yield on these investments for decades.

Pensioners left destitute after retirement? -the conduct, advice and research these fund managers applied decades ago, when they were entrusted to manage the ”the future time value”of these funds is shocking.

When I read that some Transnet pensioners receives R 1 (one) after their medical aid premium reductions were maid, my blood boils!

The advice where to invest and which Funds to place the shares in is more often than not influenced by the Financial advisers advice. Coupled with that is inflation more rampant than the government admits and so recipients of the proceeds of the Living Annuity select a percentage for pension payout larger than the percentage growth of the combined fund and now you have a disaster unfolding. Before the annuitant knows it, his funds start to run out. The Financial adviser has covered himself because he got you to sign a disclaimer right in the beginning absolving him and his company from any likability for incorrect advice or wrong information. Yet, he will continue to siphon off his percentage every year even when your income from the fund reduces. So, it is the system the government created which in noting more than legalized theft and now we will end rip with thousand of retired annuitants sliding down the path to poverty.

The answer is the change the system and to limit the commission to the Financial advisers to 1 or 2 years fees ONLY.

How much service do you think these retirees will get after the first 2 years? Reality is that advisers are the main reason that draw downs stay low. Most retirees are not financially literate like most people that comment on this site. In the platteland most don’t even have internet access. Advisers have to set realistic expectation to retirees.

I do know that there are a huge number of unscrupulous advisers out there and it annoys me greatly because as strict as the FAIS act is, it’s only effective if properly policed and that is simply not happening.

Advisers should probably not charge more than 25 basis points for ongoing advice and most aren’t even worth that. There are some(admittedly not many)that more than justify the 25 basis points ongoing fee.

The “unscrupulous advisers” you are referring to are the ones giving a whole profession a bad name. They are not advisers. They are product “smouse”, who start off with the comm they can earn and then bludgeon the client’s needs until they appear to fit the product. Find a financial planner who is your agent and not some product provider’s agent, is well qualified and have a track record of uncompromising honesty. It starts with a plan and a relationship of mutual trust and respect, not with a product.

Why don’t the Insurance companies allow people to approach them directly and obtain an annuity quote stripped of all commisions or equivalents that are loaded into the quotation?

They will charge you to cover their incremental costs. They must do this as it is good practice to recover costs.

No free lunch anywhere unfortunately, despite what socialists tell you.

I ain’t the oracle of investment but neither your local bobbejaan, having a double figure pension and personal DIY investment portfolio.

It infuriates me when I look at most of these financial advisors. Granted, there are a very few exceptions to the rule but most are, IMHO, financial-literated idiots hellbent on commissions whatever the price for the poor victim. That include the companies they work for, and I think Sanlam is right up in front of them all. If these advisors are so wonderful, honest and caring towards the pensioners, why do we need legislation to protect both the said pensioners and pension savers as well?

Bottomline: safe your @ss off towards your future pension, take a personal interest in financial stuff (like regularly reading moneyweb artiles) and do some investments yourself. Forget about the BMWs etc.

Great point Koos, if we could all do that then us Planners would not be needed. Your comments on lifestyle are spoton!

The major problems are two fold: Firstly people have not saved enough money to be able to retire!
Secondly the problem of the first cause is manifested at retirement and therefore the need for products such as Living Annuities to be able to draw more than what you should- but is absolutely necessary.
I agree with all that is always said and I agree about fees. However the broker fees earned is usually between 0.25-0.50% pa. Anymore then change brokers. The problem sit with the companies! They charge platform fees, management fees and then we pay fund management fees. Because investors are having to get maximum growth to offset the higher drawdowns, the fees are higher(EQUITY FUNDS AND OFFSHORE FUNDS CHARGE MORE MANAGEMENT FEES). At an average per living annuity of around 1.8%-2.5% per annum( excluding broker management fees) why are we not asking questions of what do the investment companies do to earn these fees? Now please remember these fees are current after major changes were implemented a few years ago where fees were far higher. Why were these questions not asked then?
The crux of the matter is fees charged throughout the term of any investment by below par fund managers who simply are tracking self designed mandates and collecting massive management fees etc. Management fees of a Living Annuity charged currently over 25 year at 2% per annum is R325 000!

According to the Trinity studies, equity only returns around 4% after inflation over the very long term. So if you are paying 2% fees, you are effectively paying 50% of your profits over to the investment management company.

I can show you real examples where clients have had a net IRR (internal rate of return) which is after ALL fees of 11.5% p.a. over the last 15 years.

@Dirkg. Past performance is not an indicator of future performance. So while the last 15 years have had great returns this does not mean you should expect the 11.5% to continue.

The very fact that over the past 15 years real return of 11.5% was possible but the average for the last 100 years for SA Equities has been only 7.2% should give you pause, as it means that the probability of lower returns over the new decade are much greater that what they were 15 years ago. Because there is a reason why something is an average. It is just matter of time until the return falls back so that the average for the period (including the past 15 years) is closer to the long term average of 7.2%.

It could be argued that the 7.2% average is no longer applicable and that a higher rate is the new average, but such arguments should be considered with skepticism and not just evaluated using recent returns.

This article takes a certain angle which does not show the full picture. What about the many entrepreneurs who have other sources of income in retirement and often have very small annuities? To base the average drawdown on retirement capital solely on the L.A. % is incorrect. A fixed annuity provides little cover for dependants on death, if it is insured, a premium is paid and what if interest rates go up again as they have in the past? there is no protection against inflation unless the CPI increase option is taken which further reduces the initial income.

I see the Financial Planner bashers continue as well. A properly qualified Financial Planner adds huge value to his or her clients especially those with minimal retirement savings.

Retired people generally don’t go to work. That also includes not running a business…

Gone are the days of working 35 years and retiring for 35 years. A planner adds immense value on the transition from working to “retirement”, not only in finances, but in terms of mind shift and value add.

You will find if you look around that many retirees consult or do other things to earn a bit of income. The point is very few retirees depend solely on their annuities.

I know it is anecdotal and limited but FP’s have cost me a fortune and I’ve tried a few. None worried about ME paying the fee; they were singing to their sales book. I am still looking.

I get you unfortunately the industry is still rewarding the wrong behaviour but things are changing. Contact the FPI and I am sure they recommend a decent, qualified and honest Financial Planner.

Dirkg – the big green managed a princely 4.5% IRR over a 25 year period and when I foolishly extended the RA for a further 5 years their fees were 4%. Once I looked at their charging structure closely I exited the RA and took the funds to another organization to handle the Living Annuity.
The one thing I can’t understand is why I have to take a 2.5% draw down annually – these funds are only for my use in 10 years time, but I am forced to reduce the capital by the drawings – quite stupid really

The old structures were ridiculously expensive Graham, you did not have to mature it to move it?

Easily overcome by simply putting back into an RA with AGray or Coronation etc.

Living annuities are not the real issue here. Rather, the issues are complex and include an outdated approach to retirement, a very poor savings culture and as a result insufficient capital for most people that even a life annuity could not address and a very significant distrust of insurance companies by the vast majority of retirees.
Dont throw the baby out with the bath water – living annuities are incredibly powerful and flexible investment vehicles – to decry them is akin to distrusting antibiotics because some people dont follow sound medical practice.

All the BIG asset managers continue to suggest that draw down rates be capped at 4%. In reality this cannot be implemented when medical aid costs continue to rise, food prices increase etc. Telling retirees to “freeze” their income while expenses increase is madness. I am not shocked at the average of 6.62% for the year 2016.

In order to receive an income you sell UNITS. Every month you are diminishing the number of UNITS you have in a living annuity. Why not come up with a way to replenish these UNITS? This is why I appreciate the Bridge Fund Managers investment strategy (Payers & Growers). Every month you draw UNITS and every quarter they replenish those UNITS with distributions that grow year on year!! You essentially almost live off your distributions, while your capital keeps growing! And while every distribution they pay out keeps growing, your share of that distribution does too because the number of UNITS you have keeps INCREASING too!!!

Investment managers in this country are so obsessed with chasing alpha, that they completely disregard the income aspect that plays a vital role in a growing portfolio. Ultimately, if you are invested in unit trusts, whats should be important to you as the investor is (a) is my investment growing (determined by price) and (b) are my UNITS increasing (determined by reinvested distributions).

The more UNITS you have, the better off you will be.

I see many “ghost planers” rigoursly defending the rotten system they have gained from over the years. I have never used a planner, invested in a managed fund or bought a product from an ins company (other than a ra in the 80’s!which i cancelled asap! ) Many times I have said that the country needs to be re-built from the bottom up. For me the 1st wld to throw out the rotten annuity system & no 2wld be the commission that real estate agents get. In Aus its 2% max!

The Payers and Growers concept is new and not ideal for everyone, nor will it work for everyone; beware the unspoken risks…. There is no one size fits all solution retirement income, every situation and every client is different. Anyone who tells you there is only one way should offer a guarantee on their “advice”.

I feel this is a very poor article by a journalist who normally writes balanced articles.
1.No one forces a retiree to use a financial planner.
2. Many academic studies show that investors who use professional advisors earn higher returns than those who don’t.
3.Anyone can manage their own living annuity. All you will save is the cost of the advisor; nothing else. No discount on platform fees or fund fees.
4. There are no hidden fees or commissions built into living annuities….with the exception of one company that still likes to talk about 100% allocation of fees. Guess which one is that? The one where the founder’s daughter accuses cell phone companies of rip-off fees!
5 Its in the later years of a living annuity that investors need financial advice, not only in the first two years.
6. You can always switch from a living annuity to guaranteed annuity…never the other way around.
7. Buy a guaranteed annuity and sleep safe and sound that inflation wont run away….! Be my guest.

“I feel this is a very poor article by a journalist who normally writes balanced articles.”

I don’t know the journalist personally. However, I know her boyfriend Igor небяспека Niebiaspieka well. Igor is an ex-security forces operative from Belarus who is actually in SA right now on import export business. I took the liberty of passing your feedback on the article on to him. I know Igor as an outcomes focused person who will likely want to get in contact with you for a brief discussion so as to avoid passing messages second hand. Don’t worry about contacting Igor, I’m sure he will be in touch with you soon 😉

Bottom-line:insurance companies WILL screw you with a-z fees until your annuity runs out or you die.THAT’s why retirees are running out of money so soon.And Metropolitan,Liberty,Sanlam,OM etc will not change their rotten ways on ‘screw you fees’ until govt imposes a small,one-time,upfront fee that insurers may charge,and that’s all.And insurers will still be wealthy monoliths, making big profits year-after-year, decade in and decade out.

I look at this differently and from the point of view of someone who has different sources of retirement income. If you have part of your income producing capital in the life insurance industry then it is wise to draw this down more quickly and preserve the rest of your capital for later in your life. Based on bitter personal experience I have no confidence in the life industry and those who punt product on its behalf.

Equally important is the fact that retirees should never NEVER draw their full available income immediately upon retirement. That is the time to set your living standards then you will not have to make impossible adjustments later

The real solution here is to make financial literacy a compulsory part of the school curriculum.

Combine that with mandatory retirement saving (each company required to have a pension fund) and get rid of the option to cash in before retirement if you move companies.

If enough is saved then annuity drawdown rates will not need to be as high.

The problem is there are to many insurance companies offering pension policies to a small pool of pensioners. In addition the living standards of there advisers and management is so high and exotic that they need to draw dawn on the pensioners retirement moneys to support there life style.

Actually johncan you are wrong. the money invested into any currently insuranc e / unit trust / pension fund is all invested into the JSE ( except those who have true offshore funds with assest swops). The fact of the matter is that this money shoul dbe invested into local companies who should be using these funds to grow their businesses and hopefully create job. This has not been happening for 20 years and everyone runs offshore to invest into other countries leaving SA without hope as the available investable funds are not utilied here! How do people think the economy will grow if those who have disposable income to invest take it elsewhere. All we are doing is building other countries and businesses! To blame brokers for fees they are entitled to get to do what they are supposed to do is wrong. No one asks the estate agent why they took 8% commission to sell you a house that has not grown or dropped in value over the past 10 years! The reality is that people rather sign contracts for thousands of Rands per month for a new Iphone but cannot afford R200 per month extra into retirement saving!

Basically “there is no free lunch”.. Low costs products like (sygnia,10x) will help.

Beware the so called “low cost” solutions. Time will show them up.

Please explain? All else equal surely lower cost wins or is it lower fee to the advisor is a losing product (to the adviser)?

What has not been mentioned so far, is one of the most important benefits of a living annuity. That being that the investment return not drawn as a pension income is also not subject to tax on the interest earned, or on dividends paid and capital gains on investment profits.
That enables one to grow pre-taxed money and thus the gross or larger sum is at work earning investment return. Taxation liability is as such pushed forward and can be made in payments as pension income or withdrawals is made over time or at a stage when the pensioner qualifies for the maximum taxation rebates and tax deductions (post age 65).

Also, one’s pension provision is not meant to serve as an inheritance provision. The purpose of pension provision (living annuity) is mainly to provide an old age pension to the pensioner and his / her spouse. There is nothing wrong if the living annuity is just about completely depleted and fully utilised in your and the spouses life time. Why not?
Other assets, such as the family silver, a life policy, real estate, discretionary savings, your Capitec listed shares (best script on the market in my humble opinion), etc can form one’s inheritance provision , if of course it don’t get sold off to pay for frail care during the last phase before your expiry.

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