Kyle Hulett, Sygnia’s Co-Head of Investments

Kyle Hulett, Sygnia’s Co-Head of Investments, introduces a groundbreaking approach to navigating market downturns while engaging in high-risk investments, redefining traditional strategies in the annuity market.

(Also see the webinar taking place on this topic 11 April 2024 – details below…)

The quest for the perfect balance of high returns and low risk is a perennial challenge for investors. Traditionally, the choice has been stark: opt for safer investments with lower returns or pursue higher yields through riskier assets, often requiring insurance or bank protection as a safeguard.

The debate in the retirement annuity space has typically been between the safety of low-risk life annuities and the potential higher yields of with-profit annuities.

Imagine, however, a third path that permits investment in volatile assets for superior returns without the downside of depleting capital in downturns. Here’s how it works.

The status quo in review

In the South African annuity landscape, investors are presented with three main choices: level and fixed escalation non-profit life annuities that guarantee a fixed income for life; with-profit life annuities, which offer the possibility of bonuses in exchange for fees; and living annuities, which provide the freedom to invest widely for potential gains.

Non-profit life annuities are currently preferred by many retirees due to favourable interest rates, but they offer no protection against severe inflation or currency devaluation risks, and the insurer retains the capital if the investor passes away early in retirement.

With-profit annuities diversify across various assets, offering bonuses for positive returns without the risk of negative bonuses, but they charge a capital fee and offer no estate benefits.

Living annuities stand out because they offer investors greater control over their investments, including the choice of asset classes and geographies. This has made them very popular, as evidenced by the significant investments in these annuities as of December 2023.

Despite these advantages, however, the challenge of living annuities is in managing the risk of fund depletion during extended market lows and in selecting an appropriate drawdown rate. Overall, then, it is clear that there really has not been a perfect retirement investment solution that is able to match future expenses.

This limitation prompted Sygnia to innovatively adapt the living annuity model, combining the benefits of flexibility, no capital charges and estate retention with the stability of with-profit annuities.

Comparing high and low inflation outcomes

Our analysis began with a simple question: Can the benefits of a living annuity be enhanced by adjusting spending during economic downturns?

We evaluated two 30-year scenarios: one reflecting a high-inflation environment with escalating costs caused by changes in global trade and energy policies, and another mirroring the low-inflation period following the 2008 financial crisis, considering factors like demographic shifts and technological advancements.

Our analysis across different drawdown rates revealed a common dilemma: higher withdrawal rates necessitate higher returns, pushing investors towards riskier equities but also increasing the risk of capital erosion during downturns.

This challenge led us to develop the dynamic drawdown model, which aims to resolve this catch-22 by allowing investment in high-risk, high-return assets without compromising capital integrity.

Introducing the dynamic drawdown model

This model is predicated on the cyclical nature of economies and markets, suggesting that strategic adjustments to withdrawal rates can help investors navigate economic cycles without diminishing their capital.

We applied various adjustments to the retirement income based on specific market triggers, introducing a method for managing income that is more aggressive than traditional annuities but that provides a necessary alternative for investors.

The model demonstrated that dynamic reductions in withdrawal rates during market downturns could significantly enhance investment longevity, even allowing for greater equity allocation and extending funds’ potential duration.

A viable alternative to traditional annuities

Living annuities play a crucial role in the current financial landscape, especially in light of high inflation rates and the potential for currency instability. Our findings suggest that by adopting a more adaptable spending strategy, investors can significantly improve their retirement outcomes.

While traditional advice often centres on saving more or delaying retirement, the dynamic drawdown approach offers a new framework for managing retirement assets, providing a low-cost, self-insured alternative to with-profit annuities.

Crucially, this tool not only offers a pathway to better manage investments through varying economic cycles, it also aligns the interests of advisors and clients to secure a better future for both.

Attend the upcoming Webinar, click below:

ENDS