Category Life Insurance

Finance minister confirms four month relief period for living annuitants

17 June 2020 Gareth Stokes

Two concisely worded pages published under Government Notice (GN) 290, 1 June 2020, were all it took to introduce some flexibility to South Africa’s living annuity regulation. Finance Minister Tito Mboweni issued the notice to allow living annuitants to make considered changes to their drawdown rates, in response to the wild financial market fluctuations consequent the coronavirus pandemic.

FAnews shared some information about the then-proposed changes in our newsletter, dated 5 May and titled: ‘An opportunity to engage with clients’. In today’s newsletter we revisit the topic to share the final regulatory position alongside some thoughts on how your clients might respond to the news. 

Drawdown regulations pre-crisis

Let us begin with some regulatory ‘speak’. GN 290 deals with the method or formula for purposes of determination of amounts per paragraph (b) of the definition of living annuities, in turn contained in section 1(1) of the Income Tax Act (ITA). This section of the regulation stipulates that a living annuitant must, once per year, and only on their contract anniversary date, set the percentage of capital that they intend drawing from their living annuity as regular income in the coming year. The regular income, which can be withdrawn on an annual, biannual, quarterly, or monthly basis, was previously limited to a minimum of 2,5% and a maximum of 17,5% of the annuity capital. 

The relaxation granted by Treasury allows living annuitants to make a change to their living annuity drawdown during the four-month period 1 June to 30 September 2020, regardless of when their contract anniversary date is. The percentage of retirement capital that can be withdrawn was also temporarily widened to between 0,5% and 20,0%. Treasury did not, however, entertain the Financial Planning Institute of Southern Africa’s request that the 0,5% minimum be made permanent. The other change announced via GN 290 was to increase the “de minimus” amount, below which the capital in a living annuity can be taken out as a lump sum, from R50 000 R125 000. This change will remain in force following the relief period. 

From 1 October 2020 the living annuity drawdown rate will revert to between 2,5% and 17,5%. For living annuitants with anniversary dates outside the relief period, this means a reset of their personal drawdown rate to that in force at their previous anniversary date. Those who enter new living annuities during the four-month relief period, and those whose anniversary date falls during the period, will have to stipulate a second, compliant withdrawal rate to take effect when the relief period ends. Annuitants who select annual income payments during the relief period will not be required to change their drawdown from 1 October. 

Countering severe capital erosion

The temporary easing of living annuity drawdown regulations was welcomed by the Association for Savings and Investment (ASISA); but with a cautionary to living annuity policyholders. Rosemary Lightbody, senior policy advisor at ASISA, said that the change was aimed at assisting retirees who may have seen a significant drop in the value of their underlying investment portfolios over the first half of 2020. 

A lower drawdown level will empower living annuitants with high equity exposures to reduce their incomes and thereby prevent excessive erosion of their living annuity capital. “Our concern is for those living annuity investors who opt to increase their drawdown rates, as this is likely to erode capital that is already under severe strain due to market volatility,” warned Lightbody. Their sentiment was echoed by Kobus Kleyn CFP®, who told FAnews that financial planners should assess each case based on the client’s needs. He is extremely conservative when it comes to increasing a living annuitant’s drawdown rate. 

Discouraging excessive withdrawals

“Financial planners should take great care in advising their living annuity clients,” he said. “A drawdown of more than 5% is already cause for concern; by 17,5 % you are facing disaster; and a rate of 20% would be criminal, unless your client was over age 85”. A good rule in making changes to a client’s retirement portfolio is to assess the impact of today’s decision on your client’s ability to achieve his or her long term financial outcomes. 

Jenny Gordon, Head Technical Advice Investments, Product and Enablement at Alexander Forbes gave the following example for a living annuitant with a contract anniversary falling outside the relief period, a monthly income withdrawal, and a capital value of R2 million. She added that the drawdown amount is always calculated based on the value of assets at the inception of the contract, or the last contract anniversary date, whichever is later. Financial planners will also have to pay attention to the treatment of clients with an annual income drawdown and whose contract anniversary dates fall in the relief period, because they would not be able to make further changes until their next anniversary. 

Monthly drawdown: Increase

If the draw down percentage elected on last anniversary date was 17,5% and the asset value was R2 million, the rand amount is R350 000 payable in monthly payments of R29 166. If the annuitant elects to increase the drawdown percentage to 20%, the maximum draw down is R400 000 payable in monthly instalments of R33 333. An amount of R33 333 may be paid for 4 months. On 1 October 2020, the drawdown will automatically revert to R29 166. 

Monthly drawdown: Decrease

If the drawdown percentage elected on the previous anniversary date was 2,5% and the asset value was R2 million, the rand amount is R50 000. The monthly payment is R4 166. If the annuitant elects to decrease the drawdown percentage to 0,5% the minimum draw down is R10 000 and the monthly payment decreases to just R833 per month, for the four months. With effect from 1 October 2020, the monthly drawdown will revert to R4 166. 

“Withdrawing a larger portion of your retirement capital should be an absolute last resort, which is implemented only once you have completed a full analysis with your financial adviser to assess the long term impact on your retirement capital,” concluded Lightbody. 

Writer’s thoughts:
The relaxation of drawdown rates on living annuities will allow an annuitant to draw down as little as 0,5% of his or her retirement capital during the four-month relief period. How have we, as an industry, reached a situation where administrators, asset managers, and financial planners could draw more in fees per annum than the retiree draws in income. Or am I missing something? I would love to hear your views. Please comment below, interact with us on Twitter at @fanews_online or email me us your thoughts

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