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.
Esta historia es de la edición 9 July 2021 de Finweek English.
Comience su prueba gratuita de Magzter GOLD de 7 días para acceder a miles de historias premium seleccionadas y a más de 9,000 revistas y periódicos.
Ya eres suscriptor ? Conectar
Esta historia es de la edición 9 July 2021 de Finweek English.
Comience su prueba gratuita de Magzter GOLD de 7 días para acceder a miles de historias premium seleccionadas y a más de 9,000 revistas y periódicos.
Ya eres suscriptor? Conectar
THE HEALTH OF SA'S MEDICAL SCHEMES
As the Covid-19 pandemic abates, finweek takes a look at the financial performance of some of the largest players.
The effect of Gilbertson's departure
With Ntsimbintle Holdings now the major shareholder of Jupiter Mines, it could change SA’s manganese industry.
Making money from music
Why investors are increasingly drawn to the music industry.
Conviction is key
Sandy Rheeder plays a critical role in Mukuru’s mission to open up financial services to the emerging consumer market in Africa through tailor-made technology solutions and platforms.
The post-pandemic toolkit
How CFOs can use technology to support growth.
Big city living exodus
Mini cities like Waterfall City and Steyn City are redefining city-style apartment living.
Big compact, big value
Handsome, with a hefty level of standard specification, the roomy Haval Jolion compact crossover is a great value proposition.
On barriers to entry
There are various ways in which a company or sector can achieve competitive dominance. They usually make for good investments.
Fear and greed in one index
To buck the trend, when markets are hot or cold, is a tough thing to do. However, it can deliver solid returns.
Africa's largest data centre facility coming soon
Vantage Data Centers plans to invest over R15bn for its first African data centre facility in Attacq’s Waterfall City.
