Adjust a withdrawal’s sells so that investor gets correct annuity payment
On a living annuity we specify an amount that the investor should get for 12 months until his next review. This amount is calculated as an annual amount of his/her investment value at review date. The amount should be exactly the same amount every month for the 12 months.
With ETF’s and shares specified in amount, only whole units are sold and transactions fees might be applicable. This results in sometimes getting slightly less cash from all the sells than the original specified withdrawal amount.
When withdrawal (recurring or once-off) is captured in AMOUNT (on instruction level or instrument level), we need to sell slightly more than what we need to if there are ETF’s and Shares involved to ensure enough cash is available to payout to the client.
On a product an ‘Adjustment factor for Withdrawals captured as amount’ can be set as a percentage:
This setting only affects recurring – and once off withdrawals stated as amounts and containing ETF’s or shares.
The amount stated on the withdrawal will be paid out to the client and not be adjusted based on the amount received from the sells. The remainder of the money will stay in cash on the account.
If the sells still resulted in not enough cash being available to pay the client the correct amount, the payment will not be included in the payment batch. The instruction will be in the Instructions-> Waiting for Payment list. The list includes a column that states the reason why the instruction cannot be included in a payment batch.
The user can then cancel the payment and manually sort out the payment by either selling more units or funding the payment by moving cash from the working portfolio in exchange for units.
NOTE: Unit sells and investments will not be affected by including a value larger than 0% in the field ‘Adjustment factor for Withdrawals captured as amount’.
Calculation
The adjustment is calculated when the instruction is submitted. At this point we sum all the sells in instruments that deal in whole units. From this value we subtract the available cash. We are then left with the minimum cash value we need from the whole unit sells. We then adjust the minimum cash value with the adjustment value as specified on the product. This value is then divided by the sum of all the sells in instruments that deal in whole units to get the real adjustment percentage that should be made to all the whole units sells. This percentage is then used to adjust the sell amounts.
e.g.
Annuity withdrawal amount R1000 per month.
Value of cash instruments: R120.
Adjustment percentage of 20% on product.
Say the withdrawal has three sells, two in ETFs (ETF1 and ETF2) and one in an instrument that doesn’t deal in whole units (UI1).
Sell1: ETF1: R500.00.
Sell2: ETF2: R300.00.
Sell3: UI1: R200.00
Sum the whole unit sells: R500.00 + R300.00 = R800.00.
Subtract available cash: R800.00 – R120.00 = R680.00.
Calculate the adjustment amount: R680.00 * 20% = R136.00.
Divide adjusted value by sum of whole unit sells: R136.00/R800.00 = 17%.
The contribution allocations will then be adjusted for sells 1 and 2 by 17%.
Sell1: R585.00
Sell2: R351.00
This method means that if there is more available cash than what is required from the whole unit sells then no adjustment will be made. And the adjustment will be smaller the more cash is available.
Last Updated on 3 years ago by Antoinette Van Meyeren