National Treasury recently announced a relief measure that will result in individuals who receive funds from a living annuity being allowed to either increase (up to a maximum of 20 percent from 17.5 percent) or decrease (down to a minimum of 0.5 percent from 2.5 percent) the proportion they receive as annuity income.
This is a temporary arrangement, and only from 1 June to 30 September this year.
According to National Treasury this will assist individuals who either need cash flow immediately or who do not want to be forced to sell after their investments have underperformed. As a result, living annuity members can now approach their financial services providers to adjust the proportion they receive as an annuity income, instead of waiting until their next contract anniversary date.
The Association for Savings and Investment (ASISA) welcomed the announcement, but with a cautionary note to living annuity policyholders. Rosemary Lightbody cautions that living annuity policyholders who increase their retirement income now may face hardship in years to come when their capital runs out. According to Lightbody, it is important for policyholders to understand that the drawdown rate changes are temporary and will automatically revert to between 2.5% and 17.5% at the end of the concession period.
Earl van Zyl, head of product development at Allan Gray, also welcomed the revised regulations, but advised that flexibility can be a doubled-edged sword and that there are many pitfalls of using this flexibility inappropriately. One such pitfall is that if retirees do not adopt these measures in a sustainable manner, the changes made may place them at greater risk of outliving their savings. “An Independent Financial Adviser can help retirees balance their critical short-term needs with their longer-term requirements of a sustainable income,” he says.
Click here to read more about van Zyl’s findings with specific reference to important factors that retirees need to consider given the change in regulations. The communication includes various discussions and graphs that illustrates different scenarios, including how long a living annuity would last under different drawdown scenarios for a given level of real returns.
Click here to read the ASISA media release.
Click here to download National Treasury’s media statement.