The retirement landscape has arguably changed significantly since the onset of Covid-19. How you might ask?
Firstly, people are inhibited from travelling abroad at this stage and even though there’s much discussion about the world opening up to “normality” whatever that might mean, international travel is still restricted. Whether it will change significantly in the near future is open to interpretation. So, the capital that retirees would have spent on travelling in general or to travel to visit children and friends abroad, has not been spent and is accumulating.
So, planning for those twice a year journeys to visit kids abroad is now in serious jeopardy and that capital might be available for other uses.
While we still have the different new variant Covid waves, even local travel is not always a certainty.
Secondly, as a result of the uncertainty pertaining to local and global markets, investors are still sceptical about re-entering the investment markets post the dismal returns from 2015 to 2019, and they elect to allocate their capital to more “secure” money market funds, even though investment markets rebounded strongly during 2020 and the first half of 2021. As always, when investor appetite for risk returns, and they are willing to take on risk again, markets might lose steam and investors get burned again.
This has resulted in investors close to retirement electing to transfer their pension fund money to the old fixed type annuity scenario where they basically discard of their capital to an insurance company for the safety of a guaranteed income in retirement. If investors are going to choose this route, the final amount of their pension funds becomes very important as the level of income they are going to receive in retirement is totally dependent on the quantum they have available at the date of retirement. This action again changes the way an investor needs to approach the last 5 years before retirement to make sure that a big drop in financial markets will not have a devastating effect on the final amount in his/her pension fund.
We have also observed that investors are willing to adopt a hybrid model where they commit capital to a fixed annuity that would guarantee their basic income requirements during retirement and then invest the remaining capital in a living annuity that would provide for extra expenses. This allows an investor to take on more risk with the living annuity as they are assured of the payment of their basic needs in retirement.
Another important factor to remember is that once a fixed annuity has been purchased, the underlying interest rate can never be changed. It is, therefore, very important to make sure that the long- term interest rate environment is favourable (higher) when opting to purchase a fixed annuity.
Another possibility is to start off by investing retirement capital into a living annuity and then after some time, when long term interest rates are more favourable, to transition to a fixed annuity. The older you are when you purchase the fixed annuity, the higher the rates will be that you can lock the fixed annuity in at. These rates are dependent on your age when you purchase the fixed annuity as the rates are determined by actuaries based on your life expectancy and not just on underlying interest rates.
It is evident that this can be a mine field and help and advice is crucial when these decisions are being made.