Revolutionising retirement income: Overcoming volatility and liquidity challenges

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HILTON TARRANT: Retirement is the golden period many of us work towards for decades. Yet volatile markets and drawdowns that strike at the worst possible moment can turn what should be a calm chapter into a source of constant worry.

Now there is a solution built for exactly this – a product that lets retirees draw a regular income, protect their wealth, and enjoy a far less stressful retirement – because in the end, financial services should serve the people who rely on them.

Paul Counihan is MD of Wealth and Investments at Fedgroup and joins us now. Paul, thank you for your time.

Let’s start with volatility. Volatility is a reality of investing. However, the impact of volatility is most intensely felt when there is simply no opportunity to earn more money. Retirees have to rely on the money they have to carry them through the rest of their lives. How important do stable returns become in this space?

PAUL COUNIHAN: Yes, thank you, Hilton, it is great to be chatting to you today, and thanks for the opportunity to discuss this topic that is actually very close to my heart. I have been personally involved in this post-retirement industry since the beginning of my career, 25-plus years ago.

So, certainly from a Fedgroup perspective, this is a personal thing for me in launching our new offering in the living annuity post-retirement space.

But yes, as you say, as you reach the time of retirement, the fact that you have the ability to contribute to a living annuity or post-retirement product is already a tick, since then you have done something leading up to pre-retirement to actually put yourself in a position to have some wealth in which you can then enjoy the fruits of it in post-retirement.

The one conundrum is that this is now the time in life where you have no income, no inflow of capital.

Therefore, the capital base that you have preserved is something that requires far more elements and far more extremes of stability from the underlying investment performance now, because that capital preservation element is just so very important now.

I do see from time to time, when there is a shortfall in that capital saving, there is this urgency to seek these aggressive growth strategies – and this often is a very difficult time to do it. We say that is probably the wrong vehicle through which to get these exorbitant alpha-based returns.

So stability and diversification is the name of the game in post-retirement.

And for a client it is that formula around saying ‘I need to at least provide myself with an income’. Or, for the advisor: ‘I need to provide my client with an income, but I also need this capital to grow. I’ll need to do it in the most stable preservation-orientated strategy possible.’

It is more now than ever that capital preservation and stability is needed in one’s investment makeup and how those assets are put together.

HILTON TARRANT: Now, Paul, living annuity products aren’t new, but there are challenges with these products. What challenges?

Let’s start with retirees. What challenges would they face with living annuity products? And then we can move on to brokers and financial advisors, because there are two parts to this equation.

PAUL COUNIHAN: Yes, you can see in the industry there has been a fair amount of innovation and product development that has tried to solve the challenges that clients have.

So I suppose [there are] two main challenges that one has with a living annuity – and I am a huge fan of living annuities. I think there are so many pros around them.

There is the fact that they are not restricted to Regulation 28 asset-class restrictions – that is a big one regarding getting the ability and flexibility to grow – and the fact that the capital is yours, you can leave a legacy, you can leave a wealth legacy. These are wonderful advantages of a living annuity.

But the challenge a retiree has is, first of all, the longevity element of the product is always at risk. As people are living longer, they are healthier – which is wonderful – and you have to be very careful around how you preserve the capital, because often the capital base has to last that much longer.

And in a living annuity, unlike a life annuity where it is a fixed income for the rest of your life, regardless of how long you live, the investment capital and the returns associated have to last you your retirement age. There is always that give and take.

The second thing is very much around liquidity. It is a compulsory product now. There are elements around the capital.

Yes, you have the options around selecting on your anniversary date what income-draw percentage you take, but thereafter, for the year, you do not have access to capital.

Hilton, at the very beginning of my career – it must have been the first month of my working life – I was exposed to, unfortunately, that tough side of a living annuity in post-retirement where I witnessed a family coming into the financial services company I was working for and desperately needing capital.

Obviously, the legalities and limitations do not give you the ability to have an ad hoc capital withdrawal, and that is one of the disadvantages or the negative challenges that clients face.

So it is this: Is my money going to last? How am I going to get it to grow? Is it going to sustain me for the rest of my life?

And then: Wait a second, I had better make sure I am very careful around how I manage this myself or with my advisor, of course – which is always recommended – to make sure that it is sufficient and I have sufficient money available to live.

HILTON TARRANT: Now the Fedgroup living annuity has been launched into the market. How does that product address these challenges, and what does that benefit look like for investors?

PAUL COUNIHAN: Great. We are very excited to be launching this post-retirement offering. We really chose to offer a ‘living annuity’ product.

The reason why it was a living annuity instead of a ‘life annuity’, and we didn’t go down the hybrid route, is that there are a lot of hybrids that are very clever.

I’m quite complimentary about the industry and where it has gone with the innovation in this space now, but if you come down to the problem, we try to solve two problems.

As we previously spoke, we have a problem or a challenge potentially with the underlying assets in the living annuity sustaining the relevant growth levels on a stable, predictable return that you can plan for. And the second problem is liquidity.

We tried to solve that in two ways, not necessitating your taking up multiple products, et cetera.

I think the only free lunch you have in the investment world is diversification, and one of the wonderful things that we’ve done – and we really have forged an incredible, competitive niche and focus and skill set at Fedgroup – is around alternatives.

What these alternatives give you – and we’ve been doing it for 35 years – is that these alternatives give this incredible stable, predictable capital- and wealth-preservation yield trajectory. They are not correlated to the markets now.

Without that asset class, you find that your diversification of your asset class and your asset make-up in your living annuity have always been missing that trip in many ways. There have been some interesting solutions.

So what we’ve tried to do is we’ve almost tried to create portfolios in your living annuity that you and your advisor can then use and select in different percentages.

But because they include these alternatives, they almost do the job of a life annuity in the income-predictability or the asset-growth predictability phase.

So you’ve got these portfolios and these asset classes that provide you with predictable rates of return, but you don’t have to sacrifice capital from a legacy and estate-planning perspective; you don’t have to give it away.

We believe that adding healthier amounts of these asset classes in the alternatives and these sorts of asset-class return profiles – which are unique and very specialised – will then give an investor and a retirement living annuitant a more predictable journey so they can plan more.

‘My draw is 5% and, sort of barring some market movements now, I should be making my inflation growth in my portfolio, therefore I’m pretty sure that I will be able to then grow my income over time.’ The broker then is more equipped. We’ll get to that shortly.

The second thing, which is really exciting, and we are super-excited to do it now, is that, as you know, one of the limitations of a living annuity is you only have the choice to amend the percentage draw, which is between 2.5% and 17.5%. You can only amend that once a year on your anniversary date. That is a hard-coded feature.

But what you also do traditionally is at that point in time, on your anniversary date, you choose the frequency of your income. Do you want your income to be paid to you by the life company monthly, quarterly, annually, et cetera?

A big game-changer we’ve launched now is saying, well, yes, you can choose your percentage draw only once a year, but why do you have to then be fixed to the frequency that you’ve chosen during the year?

So we’ve opened up the option now that you can during the year change the frequency of your income, meaning if you have chosen a monthly income and suddenly something happens in life – you never know what could happen in life, on an instruction – we can now change the frequency.

You might say ‘I rather want it quarterly’ or ‘I rather want it annually’.

What that basically means is that in the event something happens, you can actually accelerate a year’s worth of income, the balance of the year, into a payment.

And we believe that ticks that second box whereby you’ve got this little bit of security around the fact that – God forbid something happens or I need capital – I can actually access a year’s worth of income, even if I’ve chosen a monthly draw, I can access [it]. I can go to my financial services provider and say ‘Actually I need accelerated income, et cetera’.

We believe, from even a ‘treating customers fairly’ perspective, that’s the right way to run a product now.

So I think that’s going to be a bit of a game-changer.

You can see – within obviously respecting all the boundaries of how products are governed, et cetera, because that’s obviously our primary requirement – we’ve tried to solve the predictability of asset returns with a more diversified range of assets available to the investor, but to then also provide some liquidity options now within the product that is fairly limited.

So that’s where we are really proud to bring this about. The rest of it is very much as an investor or as a broker would understand now. You retain your capital; it’s your asset; you do not give it away. It’s not a life annuity; it’s very squarely a living annuity.

HILTON TARRANT: That flexibility certainly changes things materially. Paul, we spoke about those stakeholders earlier – you’ve got the retirees on the one hand, your financial advisors on the other. Obviously, the advisors play a very important role in ensuring that products like this work for the people who need them.

What benefits does the Fedgroup Living Annuity bring to the table for financial advisors or brokers, given the challenges that they would typically face with products like this?

PAUL COUNIHAN: First of all, Hilton, I’m certainly a huge advocate of seeking financial advice when taking a living annuity.

The financial world is becoming more and more complicated, there are more options available to you, so I say – certainly to the investors listening to this podcast – reach out to a trusted financial advisor.

If you do not have one, reach out to the likes of us. We can then help as well regarding getting that advice. That advice is so important now.

And obviously there’s often that reluctance because the advice, yes, it’s a fee potentially on advice that’s going to eat away. I truly believe good advice when it comes to post-retirement outweighs the effect of a fee tenfold. So that’s an important thing.

There’s this interesting thing that happens with advisors. Obviously, advisors like living annuity business in South Africa because it’s a business that stays with them now. It’s at a time in life where it’s really nice to deal with retirees; it’s a very wholesome time in life to deal with someone’s financial affairs.

But, and I can see it when I sit with a financial advisor and I’m talking to them about their retired clients, there’s almost this elevated level of burden and responsibility.

They feel at a much more enhanced level that this is the time in life now where we can’t make mistakes. We cannot make a mistake around this now. This is [when] you’re not earning, so we need to make sure.

Now, what we wanted to do is to make a product available to them in the post-retirement space which helps them provide a more predictable, stable solution in this post-retirement space. That’s really what we’re trying to help them with now.

And then also from a liquidity and planning perspective, give them more flexibility so they can use those flexibilities to help their clients plan better.

It’s quite a big one. If you look at when you’re at the point of retiring from a pre-retirement fund, whether it be an RA [retirement annuity], a pension fund, or a provident fund, you have that option of taking your tax-free withdrawal or one-third withdrawal.

We always advocate around ‘limit that’, because obviously, everything over a certain amount is taxed.

But there’s always that worry now that I’m going to be moving my money into a very illiquid post-retirement product, I need to take as much as possible. We want to avoid that, so that more benefit goes into the living annuity and that then helps that income over time.

So I just believe from a financial advisor perspective now, we are trying to give them more options, stable options, now – and obviously give them more underlying asset options that provide a more stable predictable return.

I think it’s safe to say, and fair to say, Hilton, that if you have those clients who need a double-digit draw rate on their living annuity, as you know nothing’s for free, there’s no magic.

There’s going to be a trying to get a growth-plus growth on a portfolio, and a sort of inflation-plus type of return. It becomes challenging.

So I certainly believe from a Fedgroup perspective now, we can’t be everything to everyone now if a financial advisor has clients that have relatively modest required draw rates.

But they value the fact that I can, in many ways, almost predict my result.

That’s where we are there; we’re there for that preservation and that stability type of investor. That’s our niche.

HILTON TARRANT: Paul, again thanks for your time. Paul Counihan is MD of Wealth and Investments at Fedgroup.

Brought to you by Fedgroup.

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