I retired in July 2018 and had a provident fund value of R2.2 million as well as an existing pension preservation fund with a value of R1.1 million. The preservation fund was placed into a living annuity (LA) after R400 000 tax-free encashment.
My question pertains to the provident fund, from which by law I could have withdrawn the full cash value of R2.2 million. I only withdrew R200 000 before transferring it to the LA on the assumption that the combined portfolio value of approximately R2.7 million would perform better with a higher interest-vesting component (the larger amount invested). This seemed better than settling my home loan, where the interest was at the bank’s repo rate (7.5%) for staff members.
The crux of the matter is that no one anticipated the worsening SA economic downturn, and then there was Covid-19 in March 2020. My LA portfolio lost in excess of R350 000! Hindsight is a perfect 20/20 and I could have used that lost money value to settle my bond.
My question is, due to the above where I did not – but could have – taken the full cash value from my provident fund but instead did the responsible thing [and] provide a pension via the LA, can I now withdraw cash (from the balance of the provident portion R2 million) in the LA to settle my bond?
My after-tax income started at R46 000 pm (September 2018 to May 2019), reduced to R28 000 pm (June 2019 to May 2020) and in June 2020 reduced further to R25 000 pm.
I made telephonic enquiries with the fund managers who suggested I present my request to the fund trustees. I wrote to the management trustees to ask if I could make such a withdrawal ‘after the fact’.
Their response was that it is now an existing LA and no special dispensation would be considered for a further cash withdrawal because there is governance by the Pensions Fund Act, notwithstanding that there is no reference to LA and certainly Regulation 28 is not applicable to LAs. (Why then recommend that I put my position request forward?)
My LA portfolio fund has a value of just over R2 million now so there are adequate funds to consider my request.
I assume that the LA policy document’s terms and conditions can determine the fairness of my request as I’m in the unenviable position that there is R2 million and I can’t get R350 000 to settle and secure my home while still receiving an adequate monthly pension income, as with my current income of R25 000 I literally break even. This however will decrease from June 2021 and I shall become overindebted!
I have contemplated approaching Treasury and or Sars for an appeal for a special dispensation relative to the Pension Funds Act or the Allan Gray LA policy document?
What can I do to get some help with this untenable situation as I have severe major rheumatoid arthritis and osteoarthritis and my longevity (shortgevity?) is less than 10 years; however, if I become overindebted my life expectancy will likely be greatly reduced to three or four years?
I am sorry to hear that you are unwell and that the additional stress of repaying your bond is worsening your condition.
Living annuities are governed by the Long-Term Insurance Act, not the Pension Funds Act. The latter gives the trustees of the fund a certain amount of discretion in some situations, but the same amount of discretion does not apply in the case of a living annuity. For example, your beneficiary nomination is a guide to the trustees of a retirement fund, whereas your beneficiary nomination on a living annuity is binding.
Unfortunately, you can only withdraw a lump sum amount from your living annuity if the total value falls below a prescribed amount, and in that case, you have to take all the remaining capital out. The prescribed amount is determined by National Treasury and was increased to R125 000 last year in the Gazette published on June 1, 2020.
While the value of the investment is higher than the prescribed amount (as in your case), the only way to get capital out of a living annuity is via the annual withdrawal.
You could increase your income withdrawal to the maximum amount allowed – 17.5% of the value at the anniversary date.
But it sounds like you’re already drawing close to the maximum already and, as living annuity income is subject to income tax, you might end up paying tax at a higher marginal rate by increasing your income rate further.
You are quite right that no one could have anticipated Covid and the impact it had on financial markets. However, drawing income at the rate you appear to be doing soon after your retirement is also not sustainable.
Drawing 17.5% or thereabouts from your capital will have caused the value to start dropping relatively quickly in most periods of history. So, although the market downturn and impact of Covid-19 certainly would have made things worse for you, the reality is that you were already probably living beyond your means and we would have expected your pension income to start decreasing relatively quickly, with or without the events of the last 18 months.
The sequence of investment returns in the first few years of your retirement has a big impact on how long your capital is likely to last and what percentage you can afford to draw as an income every year. Unfortunately, we cannot know in advance what the sequence of returns will look like. The ‘4% rule’ provides a general guideline in the face of this uncertainty. If you want to have a good chance that you will be able to draw an income from your retirement funds for the rest of your life and, if you want to be fairly certain that you’ll be able to increase that income by inflation every year, you should not draw more than 4% to 5% of the capital as an income in the first year of retirement.
You transferred about R2.7 million into living annuities when you retired. Using the 4% rule, your initial income should not have been more than R108 000 or R135 000 a year at most.
We generally encourage clients to repay their debts as far as possible at retirement. Your outstanding bond at the time was R350 000. You would have needed to draw roughly an extra R427 000 in cash, to end up with a lump sum of R350 000 (assuming lump sum tax at 18%). This would have left you with just over R2.2 million going into living annuities. Using the 4% rule again, a sustainable starting income would have been between R88 000 and R110 000 a year.
If you would still have had to draw more than that as a starting income, even though your bond was repaid, it is to be expected that at some point your income would have started to reduce. Of course, if you know in advance that you are unlikely to be long-lived, you can probably afford to take more than 4% to 5% of the value as a starting income, but not much more.
I would encourage you to look at ways to reduce your costs so that you can extend the lifetime of your living annuity capital.
Are you able to sell your home and free up some capital, by moving somewhere less costly or rather renting instead of buying?
You could also consider using your living annuity capital to purchase a ‘traditional’ guaranteed annuity, which is typically sold through a life company. This type of annuity is likely to give you an income of much less than you currently receive from your living annuity, but the income would at least be guaranteed for the remainder of your life. Having some additional certainty would hopefully alleviate some of your stress and improve your quality of life.
The starting value of your income would depend on your life expectancy – the longer your life expectancy, the lower your starting annuity income. Life companies typically look at gender and age to determine life expectancy, but we are aware of one life company that has now also started considering health status and granting higher initial incomes to people whose life expectancy is likely to be reduced because of their health concerns. This could work in your favour.
As with most aspects of financial planning, the solution isn’t straightforward and should ideally be discussed with a certified financial planner who follows a holistic planning philosophy, encompassing all aspects of your life.