Prevent shortfalls on annuity payments selling ETF’s or shares

Despite Adjust a withdrawal’s sells so that investor gets correct annuity payment there might still be a shortfall to payout the correct living annuity amount to a client where the withdrawal sells are made from a model portfolio containing ETF’s or shares and the sells are captured as an AMOUNT sell.

When withdrawing from a model portfolio we switch the underlying instruments in the model into cash on the model linked client account. The withdrawal amount is split proportionally over the instruments in the model. For some of the instruments in the model the amount to sell ends up being less than the price of a single unit. This then leads to a zero unit sell on some instruments. The switch on the model client account therefore sells a lower amount and there is not enough cash available for the withdrawal on the model linked client account. The model linked client account transfers all of its available cash over to the default client account, even though this is less than what the withdrawal requires.

Example: Selling from Model for annuity payment

Model consist of 3 instruments (splits 50%, 25%, 25%), client annuity amount R 1000

Switch to cash instruction:

Instrument A – 50%: R 500, Price on sell R 100, sell 5 units = R 500

Instrument B – 25%: R 250, Price on sell R 250, sell 1 unit = R 250

Instrument C – 25%: R 250, Price on sell R 300, sell 0 units = R 0

This results in a shortfall of R 250

The solution is to force these amount sells to always sell at least one unit. This will cause an oversell for this contract of R 50 as 1 unit will be sold for instrument C and then the model linked client account will have extra cash of R 50, as only the required cash for the withdrawal will be transferred to the default client account. The cash, on the model client account, will be used (when it accumulated, in the example above to R 1000) for the next annuity payment and no units will then be sold. The left over cash will therefore not exceed the value of a single annuity payment after the next annuity payment has been made after the accumulation has reached R 1000.

Should a re-balance be done on the model, the cash will be incorporated in the re-balance and units will be bought with it.

Last Updated on 2 years ago by Antoinette Van Meyeren