PRESERVING MY PENSION SAVINGS

I am changing jobs and am not sure of the best place to preserve the retirement savings I have built up in my current employer’s pension fund. The pension fund will let me keep my savings where they are, or I can open a preservation fund and move them there. A third option may be to move them into the retirement annuity (RA) fund I have been using for the past few years for additional savings, if that is permitted. I don’t know what my future employer’s fund will allow. Can you advise me?

Ian Spencer

Pierre Puren, a financial adviser at PSG Wealth in Jeffrey’s Bay, responds: The implications of the three options you outlined are:

1. Leave your savings in your current employer’s fund. You will not pay tax if you do not make any withdrawals.

But leaving your savings – commonly referred to as your pension interest – with the administrator of your current employer’s fund means you will be constrained by the fund’s rules and investment options. Administrative difficulties may arise, because you will have to deal with your previous employer’s human resources department, or the administrator, to obtain statements or change your investment options.

2. Transfer your savings to a preservation fund. You will not pay tax. You will have full control over your investment and be able to choose the administrator. With the guidance of a financial planner, you will also be able to choose from a range of investment options, such as unit trusts and direct share portfolios (depending on the size of the fund).

You are allowed one withdrawal (in part or in full) before the age of 55, subject to tax payable according to the withdrawal tax table, whereby only the first R25 000 withdrawn is tax-fee. You are not allowed to contribute (monthly or a lump sum) to a preservation fund.

3. Transfer your savings to an RA fund. You will not pay tax on the transfer. You may contribute a monthly amount or a lump sum to an RA. No withdrawals are permitted before you turn 55.

You may withdraw up to one-third as a cash lump sum when you retire from the RA. You must use the remaining two-thirds to buy an annuity.

Legislation stipulates that only the first R500 000 of your one-third withdrawal from a pension, provident or RA fund is tax-free. It is important to remember that any withdrawal made before the age of 55 or retirement will be taken into consideration when calculating the one-third cash amount.

It is best to consider your options in the context of your overall financial and retirement planning. There is no perfect solution; the best solution is the one that suits your current needs.

I strongly advise that you seek help from a financial planner with the Certified Financial Planner accreditation.

SAVING FOR MY CHILD'S EDUCATION

I’m a single mother of a two-year-old. I have R500 a month to invest in a unit trust for my child’s education. I’ve considered a tax-free savings account and I’m keen on low-cost passive managers such as 10X​ and Sygnia. 10X charges a total annual fee of 0.57 percent (including VAT), as opposed to an average of three percent charged by active managers. Sygnia requires a minimum monthly investment of R500 and the fees start at 0.4 percent and go up to 0.9 percent, depending on the fund.

Which fund should I choose, given that I have time on my side. And if you aren’t in favour of passive funds, what kind of managed fund would you recommend?

Name withheld

Magdeleen Cornelissen, a financial adviser at PSG Wealth in Menlyn, Pretoria, responds: I applaud your decision to start saving early for your child’s education. You will certainly reap the benefits of compound interest, if you adhere to a financial plan that has all the elements necessary for it to succeed.

With that in mind, we can explore some key elements of the proposed plan, which includes the investment vehicle and the asset allocation of your investment.

Given that you have enough time to optimise your saving goals, the investment can tolerate volatility. I assume the investment will have a term longer than seven years; if it does, you could consider a fund with a higher exposure to equities. Equities are the driving force in portfolios that aim to create wealth, but make sure you understand the associated risks of the funds you consider.

I cannot advise you on the precise funds to use, because many other variables need to be taken into account before I can provide you with such detailed advice.

The investment vehicle is also an important element in the success of the plan. Provided you use a more aggressive fund, a tax-free investment product could be a fantastic option, particularly because there is no tax on the interest income and dividends, and no capital gains. You could well receive a better outcome in the tax-free product, compared to a normal unit trust investment, granted that the same set of rules apply.

There is much debate over which investment style produces the best returns. Both active management and passive management have advantages. Although you must always keep in mind how costs will affect your investment, you should also focus on the value proposition related to the fee.

Passive managers have a more affordable cost structure. Clients who invest in such funds do not have the risks associated with stock-picking, and their returns resemble those of the market, or the index that the fund tracks. In your case, there is a potential risk with this investment approach if the indices are based on the South African stock market, because our market is very concentrated, which opens investors to specific stock risks.

If, however, you choose an active manager that does not charge excessive fees and has a track record of out-performing the market, or the fund’s benchmark, great value can be added over the investment term, rewarding you for your patience, as well as the fees you paid.

Products that are part of a tax-free investment plan may not charge performance fees or have hidden fees, making these products more affordable and transparent.

Different investment houses have different investment minimums. There are a number of product providers from which you can choose a tax-free investment product that is suitable to your needs, but 10X’s product range does not include tax-free investments.

INSURING INHERITED FOREIGN ITEMS

I have inherited some family heirlooms, including artworks and a few special trinkets from overseas, and I was wondering about the right way to insure them. Can you provide some advice?

Name withheld

Bertus Visser, the chief executive of distribution at PSG Insure, responds: It is often thought that simply increasing your household contents insurance will suffice in cases like yours, but there are a few things to watch out for, such as whether a valuation certificate is required to cover your inherited goods.

Depending on the insurer, items under a certain value may not require a valuation certificate, so it is advisable to find out first. If you do require a valuation, this must be done by a professional. The valuation may be a pre-condition to the insurer providing cover, or it may be required only when you claim.

Insurers also differ when it comes to specifying items on a policy – you need to check. In the case of artwork, it is important that you are able to prove ownership, and the valuation would do just that, because the valuation certificate will contain the relevant details. The valuation will also tell you how much additional contents cover to add to your policy, so that the new items will be adequately protected.

If any of your trinkets include jewellery, you may be required to specify them under the all-risks section of your policy, with the values attached. This means you are generally covered at all times, anywhere. If you already have a valuation in foreign currency for any of the items, you should have this revalued in rands, because the exchange rate could be against you if you need to claim.

As there are a few variables, it would be wise to chat to your insurance broker or insurer for the exact requirements.

Keep in mind that, whenever you acquire new or expensive items, the replacement value needs to be added to your general contents cover. This must be accurate to avoid any issues at claims stage. It is worthwhile to have your inherited items revalued annually to make sure you are covered sufficiently, just as you would review your contents cover overall because the value of items can fluctuate over time.