Blending restores income sustainability
15 May 2020
There’s no time like the present
Recent market conditions have been unprecedented, largely as a result in the slowdown in economic activity due to the COVID-19 pandemic. Governments are grappling with the decision to open economies, and to what degree. They are frantically introducing restrictions as well as economic and social relief measures to provide support to those most in need.
In South Africa, National Treasury has allowed for a once-off opportunity for retirees to temporarily adjust living annuity drawdowns before their anniversary to go up to 20%, or to as low as 0.5% from May until end August 2020.
This provides you with a unique opportunity to interact with clients at a very opportune time.
South African retirees are presented with a rare opportunity not seen in many other countries around the world. A unique combination between the COVID-19 market crash and the SA sovereign risk downgrade by rating agencies caused long-term interest rates on bonds to spike. Higher long-term interest rates is good news for pensioners because annuity rates improved significantly. This means those in or close to retirement can purchase guaranteed income for life at some of the cheapest levels seen in decades. And the gain largely offsets the reduction in the market value of investments experienced by pensioners, meaning you can restore income sustainability to pre-crash levels or even better. This is unprecedented and clients can now take advantage of this opportunity.
The graph shows annuity rate for 65 yr old male with a purchase amount R1,8m and a 62 yr old female spouse with spouse’s income of 75% and 10 yr minimum payment period. Rates show JuLI StableGro, but the profile is similar for JuLI HiGro and HiYield.
Unique ability of the blended living annuity
In an effort to manage risks in old-style living annuities, retirees are limited to changing their asset allocation and/or their drawdown percentage – with the only alternative to transfer 100% to a guaranteed life annuity. However a blended living annuity, with the unique feature to partially annuitise inside the living annuity, enables you to recommend an optimal balance between sustainable income for life and capital legacy in a single product.
By introducing or increasing an allocation to the lifetime income portfolio within the blended living annuity, you counter the effect of the sequence of returns risk and there is no further downside risk on that element. You are also not crystallising losses by switching into Just Lifetime Income because you retain exposure to growth assets which will participate in any market recovery and long-term growth through higher increases in future.
It is not an all or nothing decision. Blending allows you to structure an optimal portfolio over time, balancing the various trade-offs by making smaller adjustments compared to the alternative offered by old-style living annuities.
Identify where blending adds value to your clients
The temporary revisions to living annuity drawdown rules give you a window of opportunity to provide a tangible solution to retired clients directly affected by the market volatility – the opportunity to draw more without increasing risk.
Contact your Just relationship manager to find out how we can help you identify those clients most exposed to income sustainability risk and to provide you with a quote on the most recent market data.
The information contained in this newsnote is intended for financial advisers and is for information purposes only. It should not be regarded as advice as defined in the Financial Advisory and Intermediary Services Act 37 of 2002, or any form of advice in respect of the policy, retirement, tax, legal or other professional service whatsoever. You are encouraged to seek advice from an authorised financial adviser, or to independently decide that the financial product is appropriate for you based upon your own judgment and understanding of your financial needs.