Shariah compliant annuities

Mohammed asks: I am receiving a linked life annuity from Stanlib. Last year, the annuity made a loss of 7%. I am drawing down 17% a year. What unit trust can I invest in that will give me a better return but be shariah compliant? I am 62-years-old and this is my only income.

Maya replies: The problem here is not so much the performance of the unit trusts but the amount you are drawing down each year. In re-assessing the portfolio, the portfolio showed a growth of 11%, but because of the high draw-down you are eating into your capital.

Assess your income
The first step is to assess your income. Is it possible for you to drawdown less from your investment? This means you will either cut back your living expenses or will find some work that can supplement your income.

This is vital at your age. You are still relatively young and you need this money to last you a significant amount of time. It would be unrealistic to expect your unit trusts to deliver a 17% return every year. In fact you would need them to perform at around 22% to provide income that grows with inflation. That is not possible.

In your current circumstances you are eating into your capital. Firstly your income will fall each year as you will be drawing down 17% of a lower amount each year as your capital reduces. Secondly it is possible you will have exhausted your funds by the time you reach 72-years-old.

Fund selection
Sharia compliant funds that pay income are difficult because you cannot earn interest. Most retirement funds invest a portion in cash and bonds in order to reduce risk and provide income.

You are limited to non-interest income assets such as listed property, dividends and preference shares.

My preference would be to give the funds to a portfolio manager at a leading stock broking firm to manage the money based on your requirements which could also include a high dividend portfolio. The manager could also manage the cash flow of the portfolio which can be invested within a life annuity wrapper. The minimum requirements for a portfolio usually start at R500 000.

However you are already committed to a unit trust linked life annuity. I cannot give you advise on specific funds, but I suggest you look at the total expense ratios of the funds you invest in. It may be difficult to predict the returns, but you do know for certain the costs, and costs will eat further into your capital.

Also find out what fees you are paying to your adviser and whether you feel you are getting any advice for that fee. You can negotiate that downwards or even cancel it if you want to manage your funds yourself.

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