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94 - How to ensure you are making the most of your living annuity

Question: I recently received a letter to confirm the drawdown percentage of my living annuity. To keep the same level of income, I had to increase my drawdown to 7%, as the total value of my investments had dropped. I am worried that I may run out of money. What can I do?

Answer: Many people will be experiencing something similar over the coming year, following the really bad performance of the local and offshore stock markets in 2022. There are a couple of things that you can do to improve the situation.

Choose a better investment portfolio

A mistake that many retired people make when it comes to managing their living annuities is that they are either too conservative or too aggressive when choosing an investment portfolio.

If you are too conservative, your overall pension will not keep up with inflation and you will find it harder to come out on your pension in years to come. 

If you are too aggressive, you risk finding yourself in a situation where a stock market collapse can put the sustainability of your pension at risk. 

There are a couple of investment portfolios that are designed to give you decent long-term returns, along with downside protection. I would certainly recommend that you consider these going forward. I have used these for several of my clients and their pensions actually increased this year despite the big fall-off in the market. 

Move part of your living annuity into a life annuity 

If you convert some of your living annuity into a life annuity, the life annuity should give you a guaranteed income that will be higher than the 7% that you are currently drawing down. This will allow you to reduce the drawdown rate on your living annuity to something more sustainable. (I wrote about this in DM168 in May this year.) 

The downside, however, is that the money that you used to purchase the life annuity will not be available to your heirs should you pass away. 

Set up a structured portfolio 

I recently came across a solution that can give you a very similar result to moving some of your investments into a life annuity, but without losing access to the original investment.  

Your beneficiaries will therefore still inherit the proceeds of your living annuity, while you can manage your income on a sustainable basis. This only works if your living annuity is worth at least R3-million. 

Here you get a specialist to structure your portfolio, which includes a holding in bonds. You can currently invest in a bond that pays out 10.5%. This should be able to provide you with the necessary income without having to sell your growth investments while the market is down.  

You can always reduce your exposure to bonds when market conditions improve.