First Thing, Daily Maverick's flagship newsletter

Join the 230 000 South Africans who read First Thing newsletter.

We'd like our readers to start paying for Daily Maverick

More specifically, we'd like those who can afford to pay to start paying. What it comes down to is whether or not you value Daily Maverick. Think of us in terms of your daily cappuccino from your favourite coffee shop. It costs around R35. That’s R1,050 per month on frothy milk. Don’t get us wrong, we’re almost exclusively fuelled by coffee. BUT maybe R200 of that R1,050 could go to the journalism that’s fighting for the country?

We don’t dictate how much we’d like our readers to contribute. After all, how much you value our work is subjective (and frankly, every amount helps). At R200, you get it back in Uber Eats and ride vouchers every month, but that’s just a suggestion. A little less than a week’s worth of cappuccinos.

We can't survive on hope and our own determination. Our country is going to be considerably worse off if we don’t have a strong, sustainable news media. If you’re rejigging your budgets, and it comes to choosing between frothy milk and Daily Maverick, we hope you might reconsider that cappuccino.

We need your help. And we’re not ashamed to ask for it.

Our mission is to Defend Truth. Join Maverick Insider.

Support Daily Maverick→
Payment options

The Financial Wellness Coach: All you need to know abou...

Defend Truth

Opinionista

The Financial Wellness Coach: Advice on drawdown rates, and living and life annuities

mm

Kenny Meiring MBA CFP is an independent financial adviser. You can contact him at Financialwellnesscoach.co.za. Please send your questions to [email protected]

Question: I am 70 years old and have fallen behind with my bond repayments. I am now facing the possibility of losing my home, but I have sufficient capital in my living annuity. I’ve heard that one can cash in a living annuity if its value is less than R125,000. Is it possible to withdraw R125,000 from a living annuity if the value of the annuity is greater than R125,000?

Answer: Unfortunately, you cannot withdraw additional lump sums from a living annuity as this is part of the legislated structure of the product. You have received certain tax concessions while you were saving up for your retirement and a consequence of that is that two-thirds must be used to pay a regular income to you during retirement.

I do have a possible solution for you, but it will have an impact on the ability of your retirement capital to provide you with a sustainable income for the rest of your life.

You should therefore sit down with a financial planner and rework your cash flows. You need to understand how much money you need to live on each month and what income your living annuity can sustainably provide for you.

Possible solution

Although you cannot make an additional cash withdrawal from your annuity, you can increase the drawdown rate on that annuity for a year or two in order to get the same net effect.

The recommended drawdown for a 70-year-old is 5%. If you go above 8%, you stand a good chance of running out of money in years to come so you should only do this once a financial adviser has modelled your cash flow for you.

You can also go to your mortgage provider and offer to pay the additional amounts owing on your bond by making higher monthly payments for a year or two. This can be funded by increasing your annuity drawdowns to a higher percentage. You can go as high as 17.5%, but you need to be extremely careful at this level.

If, for example, you have a living annuity worth R2-million and are taking the recommended 5% drawdown, you will be receiving R100,000 a year or R8,333 a month.

If you increased your drawdown to R225, 000 a year for just the next year, you will have the additional R125,000 you need for your bond. Your drawdown rate will increase to 11.25%. This is summarised in the table below.

As you can see, this withdrawal will increase the effective drawdown rate. (I have assumed that the annuity is growing at a level that can sustain a 5% drawdown after costs.)

Warning

If you are currently at a drawdown level that is above 5%, then you need to be careful as you can end up drawing down too much of your capital.

This can result in you running out of capital to fund your annuity as you get older.

In order to solve this, you could move part of your living annuity into a life annuity.  

You could get a life annuity that will provide a level monthly income of about R5,000 a month from a R500,000 investment. This could reduce your living annuity drawdown from 5.3% to 2.9%

See the figures we have used in the example of the table provided below.

Remember, whenever you make changes like this, you must get your adviser to model your drawdowns and costs to ensure that you do not run out of money in years to come.

Insider tips

When you are saving for retirement, it often makes sense to invest in several retirement annuities. This will provide you with additional flexibility.

If your retirement annuity at a particular provider is worth less than R247,000, you may cash this retirement annuity in and take the benefit as a lump sum if you are over 55.   This additional flexibility would not be there if you combined all your retirement investments into one retirement annuity.

You may want to own several of living annuities instead of combining them all into one large living annuity.

If you had several small living annuities, you could cash in one of them if you have a capital need and the value was less than R125,000.

Similarly, if you needed more income, you could convert one of these living annuities into a life annuity, which would give you a higher income. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.

Gallery

Comments - share your knowledge and experience

Please note you must be a Maverick Insider to comment. Sign up here or sign in if you are already an Insider.

Everybody has an opinion but not everyone has the knowledge and the experience to contribute meaningfully to a discussion. That’s what we want from our members. Help us learn with your expertise and insights on articles that we publish. We encourage different, respectful viewpoints to further our understanding of the world. View our comments policy here.

No Comments, yet

Please peer review 3 community comments before your comment can be posted