<\/p>\n
You can also listen to this podcast on iono.fm here.<\/p>\n
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.<\/p>\n
Now there is a solution built for exactly this \u2013 a product that lets retirees draw a regular income, protect their wealth, and enjoy a far less stressful retirement \u2013 because in the end, financial services should serve the people who rely on them.<\/p>\n
Paul Counihan is MD of Wealth and Investments at Fedgroup and joins us now. Paul, thank you for your time.<\/p>\n
Let\u2019s 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?<\/p>\n
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.<\/p>\n
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.<\/p>\n
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.<\/p>\n
The one conundrum is that this is now the time in life where you have no income, no inflow of capital.<\/p>\n
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.<\/p>\n
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 \u2013 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.<\/p>\n
So stability and diversification is the name of the game in post-retirement.<\/p>\n
And for a client it is that formula around saying \u2018I need to at least provide myself with an income\u2019. Or, for the advisor: \u2018I need to provide my client with an income, but I also need this capital to grow. I\u2019ll need to do it in the most stable preservation-orientated strategy possible.\u2019<\/p>\n
It is more now than ever that capital preservation and stability is needed in one\u2019s investment makeup and how those assets are put together.<\/p>\n
HILTON TARRANT: Now, Paul, living annuity products aren\u2019t new, but there are challenges with these products. What challenges?<\/p>\n
Let\u2019s 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.<\/p>\n
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.<\/p>\n
So I suppose [there are] two main challenges that one has with a living annuity \u2013 and I am a huge fan of living annuities. I think there are so many pros around them.<\/p>\n
There is the fact that they are not restricted to Regulation 28 asset-class restrictions \u2013 that is a big one regarding getting the ability and flexibility to grow \u2013 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.<\/p>\n
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 \u2013 which is wonderful \u2013 and you have to be very careful around how you preserve the capital, because often the capital base has to last that much longer.<\/p>\n
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.<\/p>\n
The second thing is very much around liquidity. It is a compulsory product now. There are elements around the capital.<\/p>\n
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.<\/p>\n
Hilton, at the very beginning of my career \u2013 it must have been the first month of my working life \u2013 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.<\/p>\n
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.<\/p>\n
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?<\/p>\n
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 \u2013 which is always recommended \u2013 to make sure that it is sufficient and I have sufficient money available to live.<\/p>\n
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?<\/p>\n
PAUL COUNIHAN: Great. We are very excited to be launching this post-retirement offering. We really chose to offer a \u2018living annuity\u2019 product.<\/p>\n
The reason why it was a living annuity instead of a \u2018life annuity\u2019, and we didn\u2019t go down the hybrid route, is that there are a lot of hybrids that are very clever.<\/p>\n
I\u2019m 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.<\/p>\n
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.<\/p>\n
We tried to solve that in two ways, not necessitating your taking up multiple products, et cetera.<\/p>\n
I think the only free lunch you have in the investment world is diversification, and one of the wonderful things that we\u2019ve done \u2013 and we really have forged an incredible, competitive niche and focus and skill set at Fedgroup \u2013 is around alternatives.<\/p>\n
What these alternatives give you \u2013 and we\u2019ve been doing it for 35 years \u2013 is that these alternatives give this incredible stable, predictable capital- and wealth-preservation yield trajectory. They are not correlated to the markets now.<\/p>\n
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.<\/p>\n
So what we\u2019ve tried to do is we\u2019ve almost tried to create portfolios in your living annuity that you and your advisor can then use and select in different percentages.<\/p>\n
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.<\/p>\n
So you\u2019ve got these portfolios and these asset classes that provide you with predictable rates of return, but you don\u2019t have to sacrifice capital from a legacy and estate-planning perspective; you don\u2019t have to give it away.<\/p>\n
We believe that adding healthier amounts of these asset classes in the alternatives and these sorts of asset-class return profiles \u2013 which are unique and very specialised \u2013 will then give an investor and a retirement living annuitant a more predictable journey so they can plan more.<\/p>\n
\u2018My draw is 5% and, sort of barring some market movements now, I should be making my inflation growth in my portfolio, therefore I\u2019m pretty sure that I will be able to then grow my income over time.\u2019 The broker then is more equipped. We\u2019ll get to that shortly.<\/p>\n
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.<\/p>\n
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?<\/p>\n
A big game-changer we\u2019ve 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\u2019ve chosen during the year?<\/p>\n
So we\u2019ve 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 \u2013 you never know what could happen in life, on an instruction \u2013 we can now change the frequency.<\/p>\n
You might say \u2018I rather want it quarterly\u2019 or \u2018I rather want it annually\u2019.<\/p>\n
What that basically means is that in the event something happens, you can actually accelerate a year\u2019s worth of income, the balance of the year, into a payment.<\/p>\n
And we believe that ticks that second box whereby you\u2019ve got this little bit of security around the fact that \u2013 God forbid something happens or I need capital \u2013 I can actually access a year\u2019s worth of income, even if I\u2019ve chosen a monthly draw, I can access [it]. I can go to my financial services provider and say \u2018Actually I need accelerated income, et cetera\u2019.<\/p>\n
We believe, from even a \u2018treating customers fairly\u2019 perspective, that\u2019s the right way to run a product now.<\/p>\n
So I think that\u2019s going to be a bit of a game-changer.<\/p>\n
You can see \u2013 within obviously respecting all the boundaries of how products are governed, et cetera, because that\u2019s obviously our primary requirement \u2013 we\u2019ve 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.<\/p>\n
So that\u2019s 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\u2019s your asset; you do not give it away. It\u2019s not a life annuity; it\u2019s very squarely a living annuity.<\/p>\n
HILTON TARRANT: That flexibility certainly changes things materially. Paul, we spoke about those stakeholders earlier \u2013 you\u2019ve 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.<\/p>\n
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?<\/p>\n
PAUL COUNIHAN: First of all, Hilton, I\u2019m certainly a huge advocate of seeking financial advice when taking a living annuity.<\/p>\n
The financial world is becoming more and more complicated, there are more options available to you, so I say \u2013 certainly to the investors listening to this podcast \u2013 reach out to a trusted financial advisor.<\/p>\n
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.<\/p>\n
And obviously there\u2019s often that reluctance because the advice, yes, it\u2019s a fee potentially on advice that\u2019s going to eat away. I truly believe good advice when it comes to post-retirement outweighs the effect of a fee tenfold. So that\u2019s an important thing.<\/p>\n
There\u2019s this interesting thing that happens with advisors. Obviously, advisors like living annuity business in South Africa because it\u2019s a business that stays with them now. It\u2019s at a time in life where it\u2019s really nice to deal with retirees; it\u2019s a very wholesome time in life to deal with someone\u2019s financial affairs.<\/p>\n
But, and I can see it when I sit with a financial advisor and I\u2019m talking to them about their retired clients, there\u2019s almost this elevated level of burden and responsibility.<\/p>\n
They feel at a much more enhanced level that this is the time in life now where we can\u2019t make mistakes. We cannot make a mistake around this now. This is [when] you\u2019re not earning, so we need to make sure.<\/p>\n
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\u2019s really what we\u2019re trying to help them with now.<\/p>\n
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.<\/p>\n
It\u2019s quite a big one. If you look at when you\u2019re 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.<\/p>\n
We always advocate around \u2018limit that\u2019, because obviously, everything over a certain amount is taxed.<\/p>\n
But there\u2019s always that worry now that I\u2019m 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.<\/p>\n
So I just believe from a financial advisor perspective now, we are trying to give them more options, stable options, now \u2013 and obviously give them more underlying asset options that provide a more stable predictable return.<\/p>\n
I think it\u2019s 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\u2019s for free, there\u2019s no magic.<\/p>\n
There\u2019s 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.<\/p>\n
So I certainly believe from a Fedgroup perspective now, we can\u2019t be everything to everyone now if a financial advisor has clients that have relatively modest required draw rates.<\/p>\n
But they value the fact that I can, in many ways, almost predict my result.<\/p>\n
That\u2019s where we are there; we\u2019re there for that preservation and that stability type of investor.\u00a0That\u2019s our niche.<\/p>\n
HILTON TARRANT: Paul, again thanks for your time. Paul Counihan is MD of Wealth and Investments at Fedgroup.<\/p>\n
Brought to you by Fedgroup.<\/p>\n
Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.<\/p>\n
#Revolutionising #retirement #income #Overcoming #volatility #liquidity #challenges<\/p>\n","protected":false},"excerpt":{"rendered":"
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