Do you have a sensible living annuity?

A living annuity should be viewed as a long-term investment, and most people need to be invested and draw an income for 20+ years. The 3 main purposes of your living annuity are: 

1. To generate an income for you, and to ensure that you money lasts for your lifetime. But, in the event of your early death the capital may be left as a legacy to your spouse or loved ones. 

2. To protect your income against inflation 

3. To ensure capital protection over the long term

Number 1

Rule of thumb: you should draw an income of about 4% - 5% of your capital if you are aged under 70. If you are over the age of 70 your withdrawal rate can be about 8%.  – This is the one thing that you, as the pensioner have control over. If you draw too much income, then you run the great risk of outliving your money and will face the dire consequence of a decreasing pension in your older years. 

Number 2

We all know that every year things get more expensive; this is called inflation. To protect your investment and thus income against inflation, your capital must have exposure to equites. Equities are an asset class and is basically shares sold on a stock exchange. Over time this class of asset has always provided returns more than inflation.  But this asset also comes with volatility, which means the value goes up and down… luckily over the long-term it goes up. The main reason to invest in equities, is to grow your capital, so that each year you can hopefully take an inflation increase in your income.  If your capital does not grow by more than inflation in the long-term, this will result in a pension with decreasing purchase power, and this over time will be devastating.  

Number 3

The rule here is: diversify, diversify, diversify…. you must be invested in a diversified portfolio. This means that your capital must be invested in a mixture of the following asset classes:

• Equities, as discussed above – these are also referred to as a growth asset 

• Bonds (Government bonds, inflation linked bonds, corporate bonds) – this is a defensive asset 

• Property – These are normally property stocks on the exchange and are also a growth assets

• Cash – defensive asset 

So, your portfolio should have a mixture of growth and defensive assets. Importantly these asset classes should also be local (i.e. South African) or Global (i.e. USA, Asia, Europe). 

The impact of COVID-19 on your annuity:  You would have seen a decline in your capital since the beginning of the year. If you are invested in a diversified portfolio – do not make investment changes. The only sensible thing to do, is to reconsider your budget and not take any increases in income in the next year or so, in fact a reduction in income would benefit your portfolio.