According to a media release yesterday from ASISA*, living annuity policyholders withdrew on average 6.62% of their capital as income in 2016, which represents a marginal increase in the 6.44% living annuity drawdown rate recorded for 2015.
An increase in the drawdown rate is concerning in an environment of relatively meek domestic returns over the last three years as the higher the withdrawal rate, the faster the annuitant’s capital is depleted.
Commenting on the 2016 Living Annuities Survey, Taryn Hirsch, senior policy adviser at ASISA, said that “[w]hile we would have preferred to see the drawdown rate continue the small yet steady downward trend of the past five years, we have to accept that many pensioners are finding it increasingly difficult to maintain their standard of living without adjusting their drawdown rates upward.”
“We need to take into consideration that inflation came in at 6.6% for 2016 and the JSE All Share Index returned only 2.6%. Under those circumstances the small increase is understandable and pensioners and their advisers need to be commended for tightening the proverbial belt rather than increasing their drawdown rates substantially.”
Three key factors determine how long the capital will be able to produce a regular income:
- The level of income selected;
- Performance of selected investments; and
- The lifespan of the annuitant.
Comment: One should always look with a great degree of circumspection at industry averages and at short-term statistics like just one year. That having been said it is important when selecting the level of income (at the start of the annuity or at the time of the annual review) to take into account the long-term implications of the drawdown rate. This is particularly relevant when the annuitant will require income from the annuity for a long time. Equally important is determining an appropriate long-term asset allocation which has a strong probability of meeting the annuitant’s needs over time.
*ASISA, the Association for Savings and Investment South Africa, is the industry body which represents the investment and life insurance companies. ASISA’s stated mission is to “work towards promoting a culture of savings and investment in South Africa by playing a significant role in the development of the social, economic and regulatory framework in which our members operate, thereby assisting members to serve their customers better”.
Disclaimer: The information provided is not intended to address the circumstances of any particular individual or entity and should not be considered to be advice in any way. No person should act upon this information without first obtaining professional advice.