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Consume more in retirement with confidence

In South Africa we grapple with the problem that people haven’t saved enough for retirement. Added to this is the fact that people are living longer, and market returns are unpredictable, so retirees need to be resilient in the face of uncertainty. With most retirees using living annuities to give them an income, many are worried their capital could run out too early. Is there a solution? In addition to saving more consider using a retirement vehicle that manages both longevity and market performance risks.

Living annuities allow retirees to ‘draw down’ anywhere from 2.5% to 17.5% of their capital a year as income. Unfortunately, a picture is emerging that a lot of retirees are drawing down too much in their early retirement years, thereby risking having little or nothing left of their capital when they’re older.

Deane Moore, CEO of retirement income specialist Just South Africa says there is a way to consciously consume more in your active retirement years, knowing that later on you can fall back on a lower income that at least covers your essential expenses for life.

When it comes to drawdown rates, the industry ‘rule of thumb’ to maintain a steady level of income throughout retirement, taking increased longevity and inflation into account, is 4% a year. However, according to the Association for Savings and Investment SA (ASISA) the average drawdown rate of retirees in living annuities is about 6.6%. This implies that more than half of living annuitants in South Africa are drawing more than 6.6% a year, thereby jeopardising their future pension.

Research conducted by Just last year showed that 89% of respondents want a guaranteed income for life – something that living annuities can’t provide on their own. Just entered South Africa in 2015 to address the shortcomings in the annuity market. Its Lifetime Income portfolio provides members with an option to secure a level of income that will never decrease, regardless of how long they live or what happens to investment markets.

Moore says that over a 30-year retirement planning horizon, Just Lifetime Income provides a return of 2,5% per annum above the investment performance of the underlying investment – a balanced fund – to which it is linked.

“This allows pensioners to draw a higher income in retirement with greater confidence that the income level will be sustainable for life,” says Moore. “It is a practical solution to the important gaps left by traditional providers of life and living annuities in South Africa.”

The investment is available on a standalone basis or as part of a living annuity to allow for further flexibility. Currently, three well-known investment managers incorporate the Just Lifetime Income as an underlying investment option in their living annuities.

Recognising the problem of sustainability in a living annuity, the Financial Sector Conduct Authority (FSCA) recently announced that retirement fund members will be able to secure longevity protection within a living annuity. This comes following an exemption from its criteria for living annuities in a default annuity strategy.

In making the announcement the FSCA said this gives members greater choice and should encourage them to better protect themselves from old age poverty.

“We are delighted that the FSCA has introduced this exemption which expands customer choice and will help improve the financial outcomes of people in retirement,” Moore says.

Just Retirement Life (South Africa) Limited is a registered life insurance company, regulated by the Prudential Authority of the South African Reserve Bank and the Financial Sector Conduct Authority as an authorised financial services provider (FSP no. 46423). A wholly owned subsidiary of Just Group Plc, one of the UK's leading providers of retirement financial solutions.

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