Current market conditions and no advice may see pensioners impoverished

Deane Moore, CEO of Just Retirement.

According to Just Retirement research findings, almost two-thirds (64%) of South Africans will not seek advice when investing their pension and only half of them understand annuities - with limited understanding of living annuities and no understanding of enhanced annuities. Even with limited or no understanding of where to invest their retirement capital, most South Africans continue to choose living annuities at retirement to draw down a higher income with the risk of running out of savings. The research surveyed South Africans between the ages of 55 and 85 in the major metropolitan areas.

Deane Moore, CEO of Just Retirement, believes that pensioners do not realise the impact that longevity, lower market returns and higher draw-down rates could have. With current market conditions with increasing inflation and flat market returns, pensioners may need to draw an even higher income and erode their capital.

“Although South Africans invest in living annuities at retirement, the research shows that 86% of respondents prefer having a guaranteed income for life,” says Moore.

44% of South Africans surveyed could not afford to lose any of their savings during retirement and opted for low-risk investments with low equity exposure.

This is in line with international research in the UK (International Longevity Centre Fit for purpose report, January 2015), which found that the majority of pensioners prefer a stable income for life rather than taking risks in managing a pool of assets and choosing how much income to draw down. These sentiments were echoed in Australia where 90% people over age 50 believe that ‘money that lasts my lifetime’ is very important (FSI retirement fund report, December 2013).

“Pensioners across the globe want and need a solution that provides a guaranteed income for life that increases more or less in line with inflation.

“We believe that guaranteed with-profit annuities maximise income for life, with the low risk required. If pensioners undergo underwriting upfront, retirement income can be enhanced by up to 30%. The good news is that about 40% of the population qualify for an increase in their retirement income as a result of ill health, lifestyle and socio-economic factors,” says Moore.

A with-profit annuity is a type of guaranteed annuity that provides a guaranteed monthly income while targeting annual increases in line with inflation by increasing the exposure to growth assets. The returns are smoothed over a period of around six years (depending on the product provider) so that increases aren’t severely affected by short-term market movements.

Living annuities allow investors to select their annual income drawdown of between 2,5% and 17,5% of capital each year. Generally these investors are advised to select a low to medium equity exposure. The Just Retirement research shows that only one in four respondents have death benefits to address a specific need e.g. income for their spouse.

A large percentage of pensioners cannot afford to draw down at 5% to cover their living expenses as recommended by the Association of Savings and Investments of South Africa (ASISA). They need to draw down at a higher rate, which means that they will erode their capital that will lead to them only being able to draw down a lower income in the later years.

It is clear then that ensuring that you have enough money for your lifetime and leaving a legacy requires two different solutions.

“We are not advocating the one at the cost of the other. We believe that people should rather consider putting a portion of their savings in a guaranteed annuity and a portion in a living annuity. They can cover their basic living expenses with the guaranteed annuity, while the living annuity can fund additional expenses. So when we experience flat returns in the market, pensioners would not have to draw down a higher percentage of their living annuity and erode their capital. Their basic standard of living would be covered by the guaranteed annuity. The problem is that many people haven’t saved nearly enough and may argue that they won’t be able to sustain themselves by buying a guaranteed annuity. With a living annuity pensioners are allowed to draw a higher initial monthly income, but also face a much higher probability of running out of money after a few years.

“The good news is that there are more and more products that combine the two solutions. This I believe will deliver retirement solutions to serve South Africans better and address the very issue that is at the heart of the old-age poverty problem,” concludes Moore.