The main question facing those who are on the verge of retiring is: Should I buy a guaranteed income (life annuity) or face the markets (living annuity) with my retirement pot? The Covid-19 pandemic was initially benevolent for life annuity rates, with the cost of a R5 000 per month income dropping from around R900 000 in February last year to just over R700 000 at the end of March 2020, according to data from Sanlam. These prices have now returned to the level of February last year.
The main driving force behind the price of a life annuity is long-term interest rates (or the longer end of the bond yield curve). When South Africa’s debt was sold off during the March 2020 market crash, the price of government bonds dropped, and the yields spiked – remember that the yield and price of a bond works inversely. This led to those opting to buy a life annuity at the time, getting them at bargain prices.
On the flipside, those opting for a living annuity – where they are forcedto withdraw between 2.5% and 17.5% of the value of their retirement savings every year, saw the value of their capital plunge during the market crash. Subsequently, and especially those invested in high- and low-equity multi-asset funds (usually your balanced and stable funds) received a solid return.
So, what are the options, with these uncertainties, that soon-to-be retirees have? Long-term interest rates have returned to the levels before the outbreak of the pandemic although they are still relatively high. Remember that short-term interest rates, which are currently at historically low levels, are minor drivers of the price of life annuities.
This story is from the 9 July 2021 edition of Finweek English.
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This story is from the 9 July 2021 edition of Finweek English.
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