Regulator issues new draft living annuity standards for the second time

The Financial Sector Conduct Authority (FSCA) has published a new draft set of Standards for Living Annuities and Communication for Members and Retirees. The Standards instruct retirement funds on how they must guide their members to make sound decisions about their retirement.

 

This is the second draft following on the first draft last year by FSCA on the Standard on Investment Linked Living Annuities (living annuities). The new Standard sets out FSCA responses in response to queries by interested parties. The latest set must be responded to by interested parties by July 31 2020.

 

In my view, the FSCA draft Standard on Living Annuities should be used by retirement funds as a default, and as a guide by anyone using a living annuity bought directly from a linked-investment service provider or life assurance company.

 

One most important change you should adhere to is on the drawdown rate of income from a living annuity. Stick to this and you will have a much better chance of financial survival. Research by the country’s biggest retirement fund administrator, Alexander Forbes, has shown that by using higher drawdown rates than those suggested by FSCA, you will reach a “point of ruin” when your income declines in both nominal and after-inflation returns.

 

FSCA has now set down two drawdown rates. The first is the maximum drawdown rate at which retirement funds should aspire to when setting the rates. By using this drawdown rate scale, FSCA says retirees should be able to achieve a 90% probability of financial survival. This is based on average life expectancy and a balanced investment portfolio.

The new FSCA draft table also sets down a maximum allowable drawdown rate.