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Provided by the South African National Department of Health
HOW TO MAXIMISE YOUR
RETIREMENT INCOME
After decades of building your wealth, your financial focus when you reach retirement age is likely to shift to securing access to a steady income over the years to come. For South African retirees, the choice has generally been between a living annuity, a guaranteed annuity, or a blend of the two. There is another option you may wish to consider, however: investing directly in bonds within a living annuity to secure an income stream. Yash Raghavjee and Guy Allan, portfolio managers at Sanlam Private Wealth, explain how this works.
Both a living annuity and a guaranteed or life annuity will provide you with a monthly income during your retirement. But whereas a living annuity is an investment product (your funds will continue to grow in the market while you draw down an adjustable monthly or annual amount), a guaranteed or life annuity is classed as an insurance product (you will receive a guaranteed monthly sum for life, irrespective of market movements).
Whereas living annuities have over the past 20 years been the go-to choice for most South African retirees, guaranteed or life annuities have increased in popularity of late, mainly due to the compelling rates most providers are offering. A major advantage of a life annuity is that you don’t run the risk of outliving your savings (the insurer carries this risk). However, this type of product does have one significant drawback – upon your death, your remaining capital will be retained by the insurer, and no funds will be passed on to your beneficiaries.
There is a way of securing a guaranteed income stream for a period of time while not eventually forfeiting your capital, however – locking in bond rates via a living annuity.
When you buy a conventional guaranteed annuity, a life insurance company will offer you various rates for different options (for example, no annual increase, an increase of 5% per year, an inflationary increase, or various guaranteed scenarios). With this annuity, you’ll be certain of your expected monthly income, based on your quoted rate, which remains fixed.
The life insurance company will typically purchase long-dated individual government bonds with your retirement funds to match your desired income stream (also called your ‘liability’). It should be noted, however, that since annuity rates are directly linked to long-term bond rates, if you buy a life annuity when rates are low, your income, while guaranteed, will also be low.
For traditional living annuity products, you’ll complete a risk profile questionnaire and your funds will be invested in a portfolio consisting mainly of unit trusts. Unlike an individual bond, a unit trust has no maturity date – instead, it has what’s known as ‘perpetual duration’. For example, if your funds are invested in a bond unit trust, the latter will not mature – when one bond within the unit trust matures, another one is purchased with a duration determined by the mandate. The income generated from the investment is therefore uncertain.
The third option, of locking in bond rates within a living annuity, essentially replicates the investment strategy used by life insurance companies – matching your assets with your current and future liabilities. Here, the living annuity does not invest in bond unit trusts but in individual bonds, offering more certainty around returns and income production.
Purchasing government-guaranteed bonds provides a level of assurance that allows you to make decisions based on known returns rather than projected ones. But unlike a life annuity, a living annuity offers flexibility in terms of rates. If rates are low and unattractive relative to inflation, one may choose to wait until rates become more compelling.
Furthermore, any ‘surplus’ returns can be channelled towards other financial goals. For example, if you invest an amount of R10 million in a R2035 bond, the return is known to be 11.3% per annum until 2035. If you require an annual return of only 4.5% for your income needs, however, then you have what is referred to as a surplus. Roughly, only 50% of your assets would need to be used to purchase the R2035 to meet your liability of R450 000. The surplus can then be invested to achieve various objectives, such as inflation protection or mitigating sovereign risk.
In a nutshell, bonds are a cornerstone of a conservative investment strategy, offering predictable returns and lower risk compared to equities. They provide regular interest payments, which can be a reliable source of income for retirees.
Bear in mind that an investment in bonds is not entirely risk-free – the capital value can fluctuate. Local bonds are linked to the performance of the South African government, so there will be some risk involved, albeit very low (this risk would be the same for both a life annuity and for locking in bond rates within a living annuity).
At Sanlam Private Wealth, we’ve curated a selection of bonds with varying maturities and competitive rates to suit your individual needs and investment horizons. Our team will customise a retirement solution for you to harness the best of both worlds – providing enough income to cover your daily living expenses while also ensuring your capital continues to grow.
We’ll work with you to understand your unique financial goals, and craft a personal solution to safeguard your income in retirement as well as leave a legacy for generations to come.
Investing in bonds can play an important role in your overall retirement strategy. To learn more about how our bond offerings can benefit you, please contact us:
Yash Raghavjee (CFA, CMT): YashenR@privatewealth.sanlam.co.za
Guy Allan (CFA, CAIA): GuyA@privatewealth.sanlam.co.za
Sanlam Private Wealth manages a comprehensive range of multi-asset (balanced) and equity portfolios across different risk categories.
Our team of world-class professionals can design a personalised offshore investment strategy to help diversify your portfolio.
Our customised Shariah portfolios combine our investment expertise with the wisdom of an independent Shariah board comprising senior Ulama.
We collaborate with third-party providers to offer collective investments, private equity, hedge funds and structured products.
We constantly challenge the norm. Our investment process is a thorough and diligent one.
Michael York has spent 21 years in Investment Management.
Have a question for Michael?
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MANDATORY DISCLOSURE
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
INVESTMENT PORTFOLIOS
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.