South African retirees had R625.9 billion of their retirement savings invested in living annuities at the end of 2022, which marks an increase of 47.3% from the R424.8bn invested in living annuities at the end of 2018, says the Association for Savings and Investment South Africa (Asisa)
The number of living annuity policies grew by 13.5% over the same period, to 527 038 at the end of 2022.
Asisa described a living annuity as a compulsory purchase annuity that did not guarantee a regular income. The income (or annuity amount) was dependent on the performance of the underlying investments. Living annuities allowed clients to select an income level that ranged between a pre-defined minimum and maximum level.
The association recently released a five-year update on the living annuity book held by its member companies, based on consolidated statistics gathered in line with its Standard on Living Annuities.
“The Standard, which came into effect in 2010, also makes it possible for Asisa to monitor the level of income drawn by policyholders from their retirement capital.“
Asisa said that in the five years since it published the 2017 living annuity statistics, the average living annuity drawdown rate had consistently stayed below 7%.
Asisa deputy chair of the marketing and distribution board committee Jaco van Tonder said a review of the living annuity statistics from 2018 to 2022, which covered a particularly tumultuous four years for the global economy due to the Covid-19 pandemic, confirmed the robustness of the living annuity model as the average drawdown rate remained stable over this period.
Average drawdown levels
In 2011, the average drawdown rate was 6.99%, the highest recorded. Van Tonder said the drawdown rate never moved back to those levels, despite challenging market conditions.
In 2018, the average drawdown rate was 6.53%. It increased slightly to 6.72% in 2019 and adjusted to 6.71% in 2020. In 2021, the year in which South Africans suffered the biggest economic aftershocks of the Covid-19 lockdowns, the average drawdown rate moved up to 6.88%. By the end of 2022, the average drawdown rate had dropped back down to 6.66%.
Van Tonder said: “With interest that in 2020, the first year of the pandemic and also the period in which temporary Covid-19 relief measures were introduced by National Treasury for living annuity policyholders, only 6 314 out of 518 389 living annuity policies moved beyond a drawdown rate of 17.5% to a maximum of 20%. At the same time, 10 780 living annuities moved into a temporary lower drawdown band of between 0.5% and 2.5%.”
Asisa said that living annuity policyholders must draw a regular income of between 2.5% and 17.5% of the value of their living annuity assets if the policy was bought on or after February 21, 2007.
“This can be reviewed once a year on the anniversary date of the policy.”
Maintaining sustainable drawdown rates
Van Tonder said that when the percentage of income drawn exceeded the real returns of the investment portfolio supporting the living annuity, the capital base would be eroded over time.
“Annual drawdown rates of 4% to 5% in the first decade of retirement and below 8% in the later retirement years are generally considered prudent, providing annuitants with a high probability of preserving their purchasing power for their lifetime. It is therefore encouraging that in 2022, the 2.5% to 5% rate made up the biggest income band by number of policies (159 147), followed by 5% to 7.5% (98 942 policies),” he said.
Three key factors determine how long the capital will be able to produce a regular income:
- The level of income selected.
- Performance of selected investments.
- The lifespan of the annuitant.
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