Changes were gazetted on the 1st June governing conditions regulating living annuities. This is an attempt to help retirees more access to their funds if they have been affected financially by the lockdown through COVID 19.
What is a living annuity?
When you retire you have two types of pension to choose from:
A life annuity – a pension offered by a service provider which is guaranteed for the rest of your life. The liability of delivering the pension belongs to the service provider.
A living annuity – a pension which you are responsible for and manage. You decide where to invest and how much to draw as a pension. The main risk is drawing more than the fund is returning over time. For example, if the fund returns 5% in a year and your draw 10%, you reduce your investment by 5%. Over time, your capital reduces more rapidly as your income needs take more of it.
The temporary changes
Living annuities allow you to draw between 2,5% and 17,5% per annum of the value of the fund.
Investors who want to change the income level of their living annuity have the opportunity to do so before their living annuity’s next income review (anniversary) date. The range has also been adjusted to a minimum of 0,5% (for those who feel they would like to protect more capital) and 20% (for those who need more income).
Changes can be made up to 30 September 2020 when they will revert back to the previous range.
So what should you consider?
If your living annuity has lost value this year as the markets crashed in March and then recovered, somewhat, you will need to assess the percentage you are drawing relative to the value of your fund. If you increase your income level in this interim period you could well eat into your capital which will deplete your funds into the future.
If you have other resources you could reduce your percentage draw down and leave more capital behind for growth.
Another significant change
Before the 1st June you could cash in your living annuity if the value was below R75 000. This limit has now been lifted to R125 000. Be careful as tax could be applied. You should get a simulated tax directive in the first instance to determine if its worthwhile cashing in the fund verses drawing the income and paying less tax over time.
The bottom line is found in drawing less than your returns over time allowing your capital to grow. You may need the extra income now to help through this pandemic but be mindful of the impact on your living annuity into the future. Be careful not to get lulled into taking on risky investments with an unrealistic expectation of higher returns which are not likely as we unwind the lockdown and discover the damage to the economy.