SIMON BROWN: Now we have Roland Gräbe, head of DFM at Old Mutual Wealth on the line. Roland, I appreciate the early morning time. Living annuities – once you sort of hit retirement, you cash out your Regulation 28 product. You can take some of it out in cash. The rest goes into a life or living annuity. The living annuity regulation says you’ve got to draw between 2.5% and 17.5% per year.
ROLAND GRÄBE: Simon, you’re absolutely right. In order to achieve around an 11% annual return or inflation-plus-five with a traditional portfolio you have to take significant drastic [action]. It almost implies that the majority of your investments will be in the equity market, which will make you very exposed to the volatility in the market. What I will say is that very few people can even survive drawing just a 5% income. That tends to be almost the lower-end ideal situation.
ROLAND GRÄBE: Yes. Very simply put, a life annuity is an insurance product, and you basically buy a contract to receive a pension for life. Those are very expensive, because the insurance company takes that responsibility away from you and, if you want to buy a life annuity with inflation increases, you’ll probably receive a lot smaller monthly income than you might expect.
SIMON BROWN: Do we see in a living annuity – to your point of a moment ago, particularly if you’re drawing down a large amount – [that] you need to be heavily weighted towards equity? Are there restrictions? I’m thinking of Reg 28 restrictions in terms of offshore, restrictions in terms of property and cash and bonds. Do we see similar sort of restrictions within the living annuity?
ROLAND GRÄBE: Absolutely. And that’s why we in balanced-fund portfolios work with financial advisors [because] making these decisions can become really tricky, because the market and the emotions in the market often force clients to disinvest or reduce risk at the worst possible time.