Fast little loans
I am writing this column – with my grandson trying to assist – in The Hague, the Netherlands, in an apartment that overlooks the Peace Palace, otherwise known as the seat of international law, because it houses the International Court of Justice. Seeing the world is part of my adjustment to retirement.
This is the last column I will write as the editor of Personal Finance.
It is almost 17 years since Personal Finance was launched, with the admonition that I had to prove that the publication would work within eight weeks.
The first week was a bit of a disaster, because we were using new technology and there were no advertising sales. But within those first eight weeks, Personal Finance proved itself and survived.
In the intervening 17 years, Personal Finance has become an influential publication, read not only by ordinary investors and their financial advisers, but also by executives in the financial services industry, regulators and policymakers.
Research has shown that, after the sport section, Personal Finance is the best read section in Independent Newspapers’ four Saturday publications: the Saturday Star, the Weekend Argus, The Independent on Saturday and the Pretoria News Weekend.
Many people in the financial services industry have not liked what we have written over the years, particularly when we have exposed shoddy and even unlawful practices.
However, many of the issues that we have highlighted have contributed to changes in legislation, regulation and practices that, we hope, have provided you with better value for your money and more protection against the unscrupulous.
We have been threatened many a time by bombastic lawyers acting – more with bluster than on legal principle – on behalf of the people or institutions we were questioning. We have been subjected to unsuccessful smear and intimidation campaigns that have been both general and personal in nature.
What the unscrupulous fail to realise is that only by having a trusted financial services system will people save and build personal wealth. This will produce a stronger economy, which will create a more stable society and a brighter future for our children and grandchildren.
Those who build their wealth on the blatant exploitation of other people, particularly the poor and the vulnerable, such as pensioners, are undermining everyone’s future.
The main objective of Personal Finance has been to educate you, the consumer. The financial services industry and its pro-ducts are complicated and extensive, and yet they are vital for the financial well-being of every citizen.
It is only by having a basic knowledge of what products are available and which ones are appropriate that ordinary people can benefit fully from what is on offer, be it an investment or a risk assurance policy that will financially protect dependants in the event of the death of a breadwinner.
This knowledge is essential. Using a financial services pro-duct is not like buying a motor vehicle. If there is something wrong with a motor vehicle, you will find out about it fairly quickly; this is not the case with a financial product. For example, if the costs of an investment product are too high, you may never achieve your objective of a financially secure retirement. You may find this out only in retirement, when it will be too late to do anything about it.
If the premium escalation rate of a risk assurance policy is excessive, you may well find that you can no longer afford the premiums 20 years down the line, when you and your dependants most need the cover. And by that stage your health may not be what it was 20 years ago, in which case you will not be able to switch to a more affordable policy.
I go into formal retirement at the age of 65 proud of what Personal Finance has contributed to consumer education and the changes for good in the financial services industry. But I also retire knowing that the job is nowhere near complete.
There are still too many unacceptable practices; there are still too many greedy and unscrupulous crooks; and there are still too many consumers who do not accept responsibility for their financial decisions. And sadly, there are consumers who often do not make any decisions because they are afraid of the industry.
Personal Finance will continue to play a critical role in educating readers while constructively criticising the industry when required.
Let me say emphatically that the vast majority of people in the financial services industry, be they financial advisers/ planners or company executives, do prioritise your interests as a consumer.
Unfortunately, there are a few who place selfish greed and/or profits first, seeing consumers as mere saps to be exploited.
The avaricious do their best to confuse and mislead consumers; they do not avoid conflicts of interest when they should; and they have little conscience. The problem is that the few give the rest of the industry a bad name.
I have met many very honourable and concerned people in the industry who have influenced the content of Personal Finance over the past 17 years. There are far too many to name. They know who they are, and I appreciate the role they have played. The skunks also know who they are – and they should know that, increasingly, their days are numbered as legislation and regulation improves.
I must also thank the many outstanding journalists who have worked for Personal Finance over the past 17 years; without their knowledge and expertise, Personal Finance would not be what it is today.
The only colleague whom I will mention by name is Laura du Preez, who has been acting editor of Personal Finance for the past six months while I have been on a busman’s holiday, writing but not editing.
I hand over to someone who is quietly determined and well qualified. Laura has a Certified Financial Planner accreditation from the Financial Planning Institute. She also writes the healthcare chapter of the Financial Planning Handbook. Laura is eminently qualified to take over the reins.
I must publicly thank the former chief executive of Independent Newspapers, Ivan Fallon, for allowing me to embark on this 17-year adventure. I express my appreciation to both him and the current chief executive, Tony Howard, for the support and backing they have provided, often under trying circumstances, without ever attempting to dictate or interfere in the editorial policy of Personal Finance.
My final thanks go to you, our readers. We have been here because of you. If we had not been doing our job of providing you with useful information, I doubt Personal Finance would have survived.
I will not be disappearing altogether. I will continue to be associated with Personal Finance, mainly in a writing capacity. I remain deeply committed to the objectives of Personal Finance – most importantly, placing the reasonable aspirations of the users of financial products above all else.
WHY I CHOSE A LIVING ANNUITY AND NOT A GUARANTEED ANNUITY
I’ve been challenged a number of times in recent months – sometimes by some not very nice people – to state publicly whether or not I will be financially secure in retirement; in the case of the not-very-nice, hoping that I will not.
Other people have asked politely what type of annuity I will be purchasing.
I think the questions are valid. I pontificate to others, so have I followed my own advice? Here are the answers.
To start with, I have been a member of Independent Newspapers’ defined contribution (and defined benefit) pension fund for 37 years. I have been a trustee of the fund for the past 15 years.
Have I saved enough?
My pension, based on an annual drawdown rate of five percent from an investment-linked living annuity (illa), will equate to about 100 percent of my current pensionable income. Various guaranteed annuities also provide about the same replacement rate.
The defined contribution fund aims to provide a pension of 75 percent of final pay cheque after 40 years of membership.
Fortunately, I belong to a fund that is administered well and cost-efficiently. I also picked up the benefit of the closure of a defined benefit fund – and shared in the surplus – that was converted to a defined contribution fund.
The only “trick” on my part was to keep my retirement savings invested until retirement.
I also go into retirement with no debt that must be paid off and with discretionary savings apart from my pension benefits.
My other non-tax-incentivised discretionary savings are ring-fenced for specific purposes:
* An emergency fund equal to more than my required income for one year. This emergency fund is particularly important for potential medical expenses. I am fortunate that I will receive a medical scheme subsidy from my employer in retirement.
* A fund for travelling overseas to visit children and grandchildren. This money is invested in rand-denominated foreign exchange traded funds (ETFs), so it is always hedged against currency risk.
* An all-purpose fund to pay bulk costs, such as house repairs or a new motor vehicle (and I buy a new vehicle only every 10 years).
I also have a retirement annuity (RA) fund that forms part of my estate planning but will, if necessary, serve as a top-up pension. I will continue to contribute to the RA in retirement because of the tax advantages.
I did not achieve this financial security because I have any special knowledge of investment markets. I have simply saved and preserved more than 10 percent of my income for many, many years, mainly in my occupational retirement fund, unit trust funds and, more recently, ETFs (using a share-trading platform rather than the expensive ETF investment platforms). Compounding returns have done the rest.
And my choice of pension?
First, let me sound a word of warning: no one should try to emulate what I have done. The structure that I outline here is suitable for my requirements based on what I have, what I need and what I do not need. What I am trying to show here is that there are logical reasons for my choice of annuity.
For a number of reasons, I have decided not to use a traditional guaranteed annuity, and instead use an illa. My reasons include:
* I am able to keep working and earning a reasonable income. I cannot foresee never working. Therefore, I currently do not need an income from my pension savings.
An illa enables me to draw down a far lower pension than I would otherwise receive if I purchased a guaranteed annuity. There are tax advantages to this, and I defer paying income tax on the difference between the income from my illa and what would have been a higher income from a guaranteed annuity. This difference remains invested, earning tax-free returns.
* As I have selected the lowest permitted drawdown rate of 2.5 percent, I do not have to be too concerned about the effect of market volatility on my retirement capital.
Research has shown that, under most realistic market conditions, a drawdown rate of 2.5 percent from a reasonably structured investment portfolio will ensure that your retirement capital will last virtually forever. Therefore, I do not need the guarantees provided by a traditional annuity.
If I required a drawdown rate of five percent or more, I would definitely have considered an inflation-linked annuity or a with-profit annuity (where the pension increases are determined by the returns achieved in the portfolio). I would want the annuity to be joint and survivorship and have a guarantee that it would be paid for at least 10 years even if I died, and then for life if I did not die within the 10-year period.
The cushion against the effects of market volatility has influenced how I have structured my illa’s underlying investments, which is as follows:
If I needed to draw down five percent or more every year from my illa, and in the unlikely event that I decided not to convert to a guaranteed annuity, I would have a lower allocation to equities.
* I foresee that, given my current state of health, I will continue to work for some years. If I am lucky, this could result in the capital value of my retirement savings continuing to grow at above the inflation rate. If this occurs, it is unlikely that I will have to draw down more than 2.5 percent for many years. This means I will not need the risk-free pension provided by a guaranteed annuity.
This is how things stand today; tomorrow could be very different. What scares me most is what would happen if I suffered from dementia in the future and made the wrong financial decisions.
Over the next few months, I am going to decide on the default dates by when I should no longer be working, and when I should hand over the management of my finances to someone who will make the right decisions – again, that would be another reason to consider a guaranteed annuity.
And no, I am not going to tell you which annuity provider I am using. However, it is the one with the lowest costs and it allows me to buy securities directly, mainly ETFs, rather than use unit trust funds, which are becoming increasingly expensive and cost-complex with their performance fees.