November 2020 – The living annuity conundrum

The living annuity conundrum?

The COVID 19 pandemic has highlighted several retirement problems! Historically, on retirement, most retirees have invested their retirement savings into living annuities.

For living annuities to sustain an income over the duration of the investor’s lifetime two things are important:

If the income withdrawal is more than the return on the investment the capital value will decrease. This will ultimately mean that the client’s income will decrease in the future.
The living annuity is dependent on the returns produce within the underlying investments. These returns could be positive or negative

International research indicates that an investor should withdraw a monthly income of 4-5% per annum if they wish their income to be sustainable for the duration of their lives. It is a sad fact that in South Africa most people have not saved enough for retirement and they are withdrawing 7-10% per annum.

Investors who have invested their retirement savings into living annuities are facing an income crisis as the income provided by living annuities has decreased dramatically. Looking back over the past two or three years, income funds were achieving returns +/-8% per annum. However, earlier this year the South African treasury reduced the Repo rate by 3%. As a result, the average return for income funds has declined to +/- 5% per annum.

The problem gains intensity for those investors who placed their annuities into balanced funds [multi asset high equity funds] Over the past year the average balanced fund in this sector has achieved -2.79% and over five years the average Balance fund return has been 2.47% per annum. [Performance figures supplied by Morningstar as at 31^st October 2020.] What is more chilling is that in the last five major world stock market crashes balanced funds have declined by +/- 20%. This could be calamitous for living annuities.

Herein lies the problem! Investors who withdraw between 7-10% or more will see their capital values diminish and the investments are doomed to fail!

Let us be quite clear about this! One cannot spend more than what one is earning! If one withdraws 8% and the return is 2%, the capital will reduce by 6%.

Investors need to decrease their income urgently if they wish their annuities to succeed. We cannot emphasize this enough! Please contact us to review your living annuity income withdrawals and to explore alternative options.

Christmas Office Closure

Our offices will close on Tuesday 15^th December 2020 and re-open on Monday 11^th January 2021. We, at Kevin Mills Financial Services, Greg, Leonie and Kevin wish all our clients, family and friends a blessed Christmas and Happy New Year!

Stay safe and well and COVID free!

“Once in the world, a stable had something in it that was bigger than our whole world.” C.S. Lewis.

October 2018: Presentation invite and nominating beneficiaries

Invitation to an Investment Presentation

2018 has been a tough year for investments! There has been political upheaval throughout the world and global stock markets have generally declined making important investment decisions very difficult. To try and make sense of the current investment climate join Rod Hunter, Sales Manager of Investec Asset Management as he provides a market update and reviews the key challenges facing South African investors in 2019.

Difference between beneficiary nominations in a Retirement Annuity and a Living Annuity

Retirement Annuities are governed by the Pensions Fund Act. Investors are able to nominate beneficiaries however, the Trustees appointed for the Retirement Annuity Fund consider the individual client’s circumstances and whether or not the client has any dependents. The Trustees then decide as to how the funds should be distributed.

Living Annuities are governed by the Long Term Insurance Act. This means that investors can nominate beneficiaries and on the death of the annuitant the benefit will be paid to the beneficiary. The beneficiary then has the option of choosing how they wish to receive their benefit. This can be in the form of a lump sum or the beneficiary can choose to receive a monthly income or a combination thereof.

Both Retirement Annuities and Living Annuities are exempt from estate duty in terms of section 3(2) of the Estate Duty Act, regardless of whether an annuity or a lump sum was chosen by the beneficiary.

Office Closure

Our offices will be closing on the 14^th December 2018 and reopening on the 7^th January 2019. Should you have any urgent queries/needs during this period you can contact Greg on 0027 61 017 3468.

“It does not matter how slowly you go as long as you do not stop” Confucius

April 2018: The case for investing offshore

The Case for Investing Offshore

Over the past year we have been presenting the case for investing offshore.

Whilst there is a renewed optimism in South Africa, this optimism may be ephemeral. South Africa has not structurally changed! State Owned Enterprises remain a challenge to the government and there has been little change in their financial positions. The land question is problematic and clearly won’t go away; creating further political and economic instability!

Over the past twenty years the South African Rand has been volatile and has declined by +/- 6% per annum.

The current exchange rate is around US$1 = +/- R12.60. So in essence the South African rand is 15% to 20% cheaper than it was during 2016 and 2017 but strangely investors are not as keen to invest offshore as they were when the rand was more expensive! How bizarre! Isn’t investment behaviour perverse? We are even hearing silly comments like “I’ll wait till the rand is R11 to the US dollar or R10 to the dollar!” Of course we have no idea what is going to happen to the price of the Rand. It may very well trade at these levels but at 15 to 20% cheaper isn’t this a great opportunity to be investing offshore for investors with a longer term horizon.

Over the past three years the Johannesburg Stock Exchange All Share Index has performed poorly and only achieved an annualised return of 1.81 %. This has not been a great return bearing in mind the amount of risk associated with investments in shares. Most fund managers are finding better investment opportunities offshore!

Investing offshore allows for diversification benefits, reduced emerging market and currency risk and the maintenance of hard currency spending power.

South Africa represents less than 1% of the world economy. Investing offshore allows investors to spread their investment risk across different economies and regions. It also provides access to industries and companies that may not be available in South Africa. There are numerous other countries that provide diversity and great investment opportunities.

All I all we believe there is a strong case for investing offshore for investors with a medium to long term horizon. Contact us for more information on offshore investing. We are able to provide exciting investments opportunities in US Dollars, Sterling, Euro and Australian Dollars.

Allan Gray reduce the minimum investment requirements

Allan Gray is reducing their minimum investment amounts on their offshore platform from 16^th April 2018 making it easier for South African investors to invest in to their attractive range of funds.

Income withdrawals on Living annuities

In July 2017 we discussed the income withdrawal on living annuities and that investors are generally withdrawing unsustainable income from their living annuities. The poor annualised returns of 1.81% on the Johannesburg Stock Exchange All Share Index over the past three years have highlighted the income withdrawal problem and it is therefore worth repeating our 2017 newsletter article.

The major problem is that most investors have not saved enough money for retirement and are therefore forced to withdraw a higher income than that which is prudent. Ultimately this makes their long term chance of investment success unlikely.

According to Marriott Income Specialists:

“Market data for South Africa going back to 1900 has shown that the “safe max” income drawdown within a living annuity strategy is 4% p.a.

Given the above and the possibility of below average returns over the next decade, living annuity strategies in South Africa could be put to the test. Higher returns of the past have masked the impact of investors drawing too much income and eroding their capital, and it has only been the last two years that we have seen the impact of lower returns on living annuity strategies.

In our view, a fail-safe option for drawing an annuity income in this uncertain environment is to ‘spend the income, not the capital’ and this can be achieved by creating a portfolio of funds that produce a net income yield (after fees) that is as close as possible to the annuity yield drawn. This will ensure than an investor’s annuity income is funded by the income produced by the investment, and not from the underlying capital base.

The Perpetual Annuity (Marriott’s living annuity) enables investors to match their annuity income requirements to the income produced from the underlying investments, thus ensuring capital and future income streams are preserved into perpetuity.”

Investors will probably need to re-think about the amount of income that they are withdrawing from their living annuities. The magic withdrawal number is 4% per annum. Anything higher than this may lead to the investment failing in the longer term!