Annuities provide income
KOLLIG: Annuities are designed to provide an income for life. Because of their flexibility in design those whom they pay can alter – in the cases of living annuities – their payouts or drawdown rates.
Annuities are designed to provide an income for life. Because of their flexibility in design those whom they pay can alter – in the cases of living annuities – their payouts or drawdown rates.
Desirable as this flexibility is, it can lead to the problem of running out of money before running out of life.
This is a fairly well known problem. Are there ways to improve the changes of an annuitant stretching their income sufficiently to meet their needs?
The maximum allowable drawdown rate is 17,5% of market value, but unless the initial capital sum invested in a living annuity, is very substantial, this drawdown rate would lead to capital depletion fairly quickly. In 2011 90% of money into annuities went into living annuities – and 50% of these had drawdown rates in excess of 7,5%, up to then the average income rate was 7%.
Due to uncertain economic markets it is regarded and advised that drawdown rates be lowered by annuitants who do not
have substantial initial capital invested and/or do not have other voluntary investments in place.
A drawdown rate of 5% is the figure quoted by many in the financial industry, particularly in the early stages of retirement.
The lower drawdown rate makes a huge difference, as does delaying retirement a few years.
If you delay retirement by three years you can increase the sustainable drawdown rate by about 20% without making further contributions.
Longevity is also a stumbling block for many, because if you have made it to retirement age chances are very high that you will live another 25 to 30 years, this makes funds at retirement last longer all the more important.
Investing in a Living Annuity or to opt for other instruments at retirement is one of the most important financial
planning stages in the life of a natural person, urging professional financial planning at its best.
Regards, till next time.
Koos de Wet
• Koos de Wet is a Financial Planner at PSG Wealth and a member of the Fiduciary Institute of South-Africa. Readers can contact him at 015 491 2020 / 082 881 4672 or psgk@mweb.co.za
