COVID-19 CRISIS

TEMPORARY RELIEF FOR LIVING ANNUITIES

Dear Living Annuitant

The coronavirus (COVID-19) pandemic has caused widespread concern and economic hardship for South Africans and for people globally. To help lift your burden, we sent you a communication piece in April titled “How to look after your retirement saving in a time of a crisis”. Since our last communication, there was substantial engagement on living annuity funds between the retirement industry bodies and National Treasury. The following development ensued.

National Treasury released Notice 618 on 1 June 2020. The Notice provides temporary easing of the draw-down limits for living annuitants and is the subject of this communication. Specifically, we discuss what this means for you as a living annuitant of the Cape Municipal Pension Fund (“the Fund”) and we detail the Fund’s approach to the implementation of these temporary measures put in place.

In terms of these temporary relief measures, the following applies: 

• For a period of four months between June and September 2020, and regardless of the anniversary date of the living annuity policy, the draw-down range is temporarily eased and now provides for draw-down rates of between 0,5% (down from 2,5%) and 20% (up from 17,5%).

The purpose of the relief measures, as stated in the initial draft, is to “…assist individuals who either need cash flow immediately or who do not want to be forced to realise living annuity investments that have underperformed, Government proposes amending GN290, Government Gazette 32005 of 11 March 2009 by expanding access to living annuities for a limited period of four months..”

There are many individuals facing the risk of cash flow problems or significant losses, as the value of asset classes in which some living annuitants are invested has decreased. Therefore, as part of the measures aimed at limiting the impact of the Covid-19 crisis on South Africans, National Treasury provided living annuitants with temporary relief measures that will allow greater flexibility for living annuitants to manage their income and the effects on their retirement savings during this period. The intention is to  provide for additional cashflow (by increasing the maximum draw-down ) or a reduced annuity until assets recover (by decreasing the minimum draw-down rate). It is important to note that these are only short-term measures.

Before we go into the details of the Notice and how this applies to you, it is important to summarise the current rules that apply to living annuitants of the Fund i.e. before the temporary relief measures effective 1 June 2020.

The current position

Currently, those members with a living annuity policy are only entitled to change their draw-down rate once a year on the anniversary date of their retirement and are limited to draw-downs at the lowest limit of 2.5% of the capital amount and at an upper limit of 17.5%.

The Fund imposes a further maximum to their in-house living annuitants in terms of the rules of the Fund as follows:

Maximum draw down: The lesser of   

• 17.5% of the balance in your Investment Account

        or

• The amount of a guaranteed non-profit single life annuity (with no guarantee and no increases) that could be secured with  the living annuity capital.

The new temporary arrangement for the draw-down rates 

For a period of four months, between 1 June 2020 and 30 September 2020, living annuitants can make reasonable changes to their draw-down rates immediately, rather than wait until the anniversary date of their retirement (the review date). Under the temporary relief granted, living annuitants will be able to revise their draw-down rates between a minimum of 0.5% (down from 2,5%) and a maximum of 20% (up from 17,5%).

An extract of the notice reads:

“(a) at the election of the annuitant, from 1 June 2020 to 30 September 2020, the amount referred to in paragraph (b) of the definition of "living annuity" in section 1(1) of the Income Tax Act, 1962 (Act 58 of 1962), may be determined to be not less than 0,5 per cent and not greater than 20 per cent of the value of assets referred to in paragraph (a) of that definition, irrespective of the date on which the living annuity contract was concluded;

(b) in addition to the election contemplated in paragraph (a), for the purposes of the amount referred to in paragraph (b) of the definition of "living annuity" in section 1(1) of the Income Tax Act, 1962 (Act 58 of 1962) as prescribed by Government Notice 290 published in Government Gazette 32005 of 11 March 2009, an annuitant may elect a different draw -down percentage at the anniversary date of inception if that anniversary date falls within the period 1 June 2020 to 30 September 2020.”

What does this mean?

• Individuals in receipt of a living annuity may temporarily and immediately either increase their draw-down (up to a maximum of 20 per cent) or decrease their draw-down (down to a minimum of 0.5 per cent). They are permitted to do so at any time during this period (irrespective of whether or not the living annuitant’s anniversary date falls within the said period).
• Any elections made during this period will only be applicable for the four-month period. After the end of September, the draw-down will automatically revert to the rate applicable before the said election.
• Individuals whose living annuity review date falls in the four-month period, and who selects a temporary draw-down below 2,5% or above 17,5% in terms of the relief offered, must also select a draw-down percentage that will apply after the end of September.

Added to the above, the threshold for the lump sum withdrawal of the full residual value of a living annuity has been increased to R125,000. This amendment is however a permanent change and will continue to apply after the four-month period.

What does this mean for the Fund’s Living Annuitants’ draw-down rates?

• All living annuitants will be given a once-off opportunity to elect to either decrease their draw-down (down to a minimum of 0,5%) or increase their draw-down (up to a maximum of 20%) for the four-month period between June and September 2020.
• By 1 October 2020, the living annuitant’s draw-down rate will automatically revert back to what it was before the start of the four-month relief period.
• Living annuities that start within the four-month relief period, as well as living annuitants who have an anniversary during the four-month period, i.e. (between June and September 2020) and who choose also to access these temporary relief measures, must select two draw-downs as follows:

1.    A temporary draw-down that will apply until 30 September 2020; and

2.    A draw-down that will apply after 30 September 2020, and until the next anniversary date in 2021. This draw-down rate must be between 2,5% and 17,5% and will be further subject to the maximum limits set by the trustees, on the advice of the Actuary.

• While the effective date of the relief offered in terms of the Notice is 1 June 2020, the implementation date for any change in the draw-down rate selected in terms of these temporary relief measures will be 1 July 2020.

The Board of Trustees comment

The Board of Trustees continuously reviews the draw-down rates of living annuitants. Trustees remain concerned that many annuitants are drawing down from their retirement capital at a higher rate than what the Trustees recommend, on the advice of the Actuary. Trustees have a responsibility to ensure that draw-down rates do not compromise the sustainability of a living annuitant’s account. However, Trustees understand that there may be individuals for whom the temporary measures will offer genuine, and much needed benefits and relief. Trustees do not encourage a living annuitant to increase their draw-down if they can manage with the current draw-down they are receiving.

The Trustees are pleased that the Market and Low Equity Balanced portfolios fared well over the months of April and May 2020. For living annuitants invested in these portfolios at the end of March, the April and May returns may have already provided some reassurance that, with time and patience, markets should recover.

The flexibility offered by these temporary measures must be carefully considered and living annuitants must exercise caution and responsibility in accessing any of these relief measures. While these measures are of a temporary nature and are meant to provide relief and assistance where necessary, we urge living annuitants to consider whether accessing these measures on this temporary basis may have unintended long term or permanent negative consequences for the future. Ask yourself whether increasing your income draw-down percentage specifically, will provide the type of relief intended by the Notice. If the answer is no, you are better off not making any change to your draw-down percentage in terms of the relief measures. We want to try to avoid any possible negative outcomes, e.g. members panicking and increasing their draw-downs without plausible reason.

Should you wish to make any change to your draw-down as a result of the temporary relief measures, please complete an “Instruction to change living annuity draw-down” (attached to this email) and return the completed form to lsavahl@capefund.com or to info@capefund.com by no later than 24 June 2020.

June 2020