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everyone agrees with everything that is said in this book, so their mention here shouldn’t be taken as agreement with our views. This is simply our effort to share the information as prudently as we see it.
BRUCE CAMERON
AUGUST 2020
1
How to Avoid Your Point of Ruin
Pensioners in South Africa are in a difficult and vulnerable position. To help alleviate the stress of the current uncertainties, this book will help you find your way through the various problems you may now face.
Most retirees around the world will be impacted by the consequences of COVID-19. But in South Africa, their position is going to be far worse. COVID-19 comes as the sugar-rich icing on top of extreme corruption in government, which became entrenched during the kleptocratic Zuma regime and continues to infect the ruling party.
To begin with, let’s take a look at how these factors relate to each other and how they threaten your retirement:
The COVID-19 pandemic: This is not a case of the flu. It is going to have a long-lasting effect on pensioners, in terms of both their health and their finances.
The Zuma regime: The nine years of Zuma’s government have had a devasting effect on the economy. It is still ongoing, as some of the responses to the COVID-19 pandemic have shown corruption in both the public and private sectors.
The effect on the rand: The combination of COVID-19 and government corruption has resulted in the junking of the South African rand. In his emergency budget on 24 June 2020, finance minister Tito Mboweni said, ‘Our Herculean task is to close the mouth of the hippopotamus! It is eating our children’s inheritance.’ The hippopotamus is debt that could very easily spiral out of control. For every rand taken in taxes, 21 cents is already spent in paying off debt without growing the economy. Our gross domestic product (GDP) is expected to contract by 7.2 percent in 2020, and taxes will rise over the next four years.
The mis-selling of annuities (pensions): Most of South Africa’s pensioners were already in serious trouble before the COVID-19 virus and the Zuma regime. There were a number of reasons for this, from their not saving enough to then using investment-linked living annuities (ILLAs or living annuities) to disastrous effect in attempts to make good with high-income pension drawdowns and high-risk investments.
WHAT PENSIONERS MUST DO
South Africa’s pensioners need to take steps now if they are going to ward off the various crises they currently face. The most important thing you have to avoid as a pensioner is your financial ‘point of ruin’, where you start running out of money at an accelerating rate. This is more critical than ever for South Africans as we navigate the effects of the COVID-19 pandemic and the legacy of the Jacob Zuma administration.
Retirees must look carefully at their finances. In particular, they must urgently review the following aspects of their situation:
The way their pensions are structured to provide a safe and secure income into the future. Retirees must place their own future first, not that of their beneficiaries.
The flow of their budgets, in order to cut out spending on what is a want rather than a need.
Other sources of income, such as a job if possible, and/or speaking to family members and friends for assistance. It is better to speak now rather than when matters are out of hand.
Possible ways to reduce their expenses, such as for their housing and transport. For example, relying on Uber might be a sensible option.
The well-being of their and their partners’ finances before factoring in any beneficiaries.
It isn’t that the theft of public money is new. It was already under way going back decades, probably deep into the apartheid years. But it seems to have stepped up a notch with the corruption of the 1999 arms deal, and then let loose massively when, at the 2009 election of Jacob Zuma, the words on his supporters’ lips were ‘Now it is our time to eat’. And eat they did, leading to the virtual collapse of the municipal system of government, the provincial system and the administration of national government, to say nothing about Eskom and South African Airways and other utilities.
This kleptocratic attack did not just lead to massive corruption. It has also resulted in the part or whole destruction of many public institutions. The South African Revenue Service was not the only one: there have been others far worse affected.
The socio-economic impact of the COVID-19 pandemic is going to be enormous. The worldwide lockdown in 2020 has added a financial challenge that never followed other recent crises, such as the 2007–2010 subprime mortgage crisis in America, which also had a global impact. Nothing like this has had such a wide-ranging effect on individual wealth, from employment and savings to pensionable income.
Retirees are among the worst affected by the COVID-19 pandemic. This is most notable in two ways:
the greater mortality rate of older citizens due to the COVID-19 crisis; and
the financial consequences of maintaining the sustainability of their pensionable income during sudden downturns in investment markets, even though many have recovered somewhat, and the long-term effects of the COVID-19 pandemic. It must be remembered that most South African private pensioners have already retired on too little money. This will be a serious body blow to many.
Then add to this the effects of the kleptocratic Zuma regime. One of the main reasons for the rand to have fallen and to have stayed down against the main international currencies is Zuma – not the COVID-19 pandemic.
Normally one would say to most investors, including pensioners: ‘Wait it out.’ Unfortunately, you cannot wait for the crisis to pass this time around. The future is going to be different, but we still don’t know how different it will be. Investment markets are going to be volatile, employment is going to be different, and some businesses will flourish while others will die.
In a macabre way, state pension schemes may benefit because of the effect of the elderly being more at risk, meaning less will be paid out in pensions, easing the pressure, particularly in European countries where state pension schemes are becoming unaffordable because of longevity.
One of the advantages of market dips when you are building up savings on a regular basis is that you are able to buy assets cheaply that will gain value as markets improve again. But when you retire and live on an income based on your retirement savings, it’s very different. When you are drawing down an income, you are reducing your capital at a far greater rate when investment markets collapse. And the longer they stay down, or even remain level, the worse off you will be.
It is important to remember that pensioners are facing the greatest dangers. And 90 percent of all pensioners choose a living-annuity vehicle rather than a traditional life assurance guaranteed annuity.
Let’s say that today, no matter how long you have been retired, you have retirement capital of R6 million. You are drawing down 7 percent of your capital a year, giving you R35 000 a month before tax. (Be warned: at an average drawdown rate of 7 percent, pensioners are already in trouble, but that is the reality of how things are in South Africa.)
The market then crashes by 20 percent, reducing your capital to R4.8 million. You stick to your R35 000 a month (R420 000 a year), because you can’t afford to live on less and you can only change the income levels on your annual anniversary date.
These tables will give you an example of what happens to your drawdown percentage if you stick to the same rand drawdown level. By year eight you are in trouble.
Table 1.1: End of year one
| Investment value | Per month | Per year | Drawdown % | ||
| Start value | R6 000 000 | R35 000 | R420 000 | 7% | |
| Market |