PLANNING POINTS
Covid-19 has blindsided us all in some way or other. Retirees don’t only have to be extra careful not to contract the virus; they also have to face up to the serious dent that the stock market crash has made in their retirement capital. Luckily, the government is making some temporary regulatory changes to ease the pain.
Retirees whose living annuities (LAs) are invested in balanced funds have seen a decline of about 15% in the value of their capital in the past two months. And research shows that inflexible drawdown rates can compound the impact of a market crash.
Retirees who are already facing cash flow problems might be tempted to increase their drawdown. Conversely, people who aren’t reliant on their LA income may wish temporarily to lower their drawdown rate to preserve capital.
In normal times, a retiree may draw down between 2.5% and 17.5% of the capital value of their LA each year. This rate can be changed only once a year, on the anniversary date of the investment.
Recently, the National Treasury announced the following changes:
* The once-a-year rule will be amended to allow retirees to make changes immediately.
* The lower limit will be further reduced to 0.5% to enable those who can afford it to preserve the value of their capital.
* The upper withdrawal limit will be raised to 20% to allow retirees who are in need of urgent funds to withdraw a greater amount.
The temporary change in the annuity drawdown rate can be made at any time from May 1 to August 31, regardless of the anniversary date. On September 1, the drawdown rate will revert to what it was originally.
So, should you take the gap and change your drawdown rate?
The key to survival in today’s times is flexibility and the willingness to change. How you respond depends entirely on where you find yourself financially.
* If you’re not reliant on your LA, reduce!
If you’re in the fortunate position of not being reliant on the income from your LA, I’d strongly recommend that you reduce your drawdown to the minimum of 0.5% to preserve the capital value of your retirement nest egg.
With some luck, this rule will become permanent, because the current lower limit of 2.5% prejudices those who were forced to retire from their pension funds under the old rules. Of course, we all hope that history will repeat itself, and the market will swiftly self-correct. But realistically we could see an extended period of low returns. Permanently changing the lower limit to 0.5% seems the right and equitable thing to do.
* If you’re an early retiree, reduce!
In my previous article I wrote about “sequence of returns risk”. We saw that suffering negative returns early on in your retirement is far more damaging than suffering similar returns later in your retirement. If you’ve just entered retirement, it is vital that you reduce your drawdown rate right away.
* If you’re struggling, don’t increase!
If you’re not making ends meet on your LA income, I highly recommend that you review all your expenses very carefully and cut back wherever you can. Increasing your drawdown rate should be seen as an absolute last resort.
You also have the option of changing your LA into a life (or guaranteed) annuity. which gives a guaranteed income. This can sometimes work out well - but be sure to do your homework. What’s more, I’d only want to be in bed with a seriously reputable life company with a strong balance sheet in this climate.
Another change to bear in mind
Previously, smaller annuities with a value of up to R50 000 (where one-third had been taken in cash) and up R75 000 (where no cash amount had been taken) could be withdrawn in full. This threshold has been increased to R125 000 across the board. This change will be permanent.
Remember that the withdrawal will be subject to lump-sum taxes if you’ve already withdrawn more than R500 000 from retirement funds in the past.
The bottom line
If Covid-19 has taught us anything, it is that we have to learn to live with uncertainty - to be flexible and only fret about the things that are within our control. We all need to accept that there’s going to be some long-lasting damage to the economy - both locally and internationally. This means coming to terms with the fact that your financial growth is probably going to slow down for the foreseeable future.
Right now, we all need to think carefully about every expense and ensure that our money really does work for us. To navigate these choppy waters, I’d strongly suggest getting advice from a Certified Financial Planner professional, who will be able to look at your situation objectively (but empathetically) and suggest the best course of action.
Hardi Swart is director of Autus Private Clients and Financial Planner of the Year 2019.
PERSONAL FINANCE