Email your queries to [email protected] or fax them to 021 488 4119. Feature sponsored by PSG Wealth.
Where to invest for retirement?
I am 55 years of age and self-employed. I do not have a pension fund or a retirement annuity fund, or any discretionary investments. I do not have any personal or business debt, and I own my property. My partner passed away recently, and the life insurance payout is about R1.5 million. I want to use this to finance my retirement in five years’ time. I want to invest the money in a product that will protect the capital value and earn inflation-beating returns. Where are the best places to invest?
Pierre van Staden
Magdeleen Cornelissen, a financial adviser at PSG Wealth in Menlyn, Pretoria, responds: When setting up an investment plan, you should consider, among other factors, the term of the investment, the amounts that will be withdrawn regularly, your risk profile and the required capital growth.
You stated that the investment will have to produce an income in only five years. This time frame allows you to include some growth assets in the portfolio.
Some investors might be tempted to invest the capital in a guaranteed product with a five-year term, but currently the rates from these products are low, so I suggest you look for other products that can grow your capital – for example, unit trust funds.
You could invest a portion of your capital in low-equity multi-asset funds. These funds consist of different asset classes, including shares, bonds, listed property and cash, depending on where the fund manager finds value. To limit volatility, the share exposure of low-equity funds may not exceed 40 percent.
Taking into account that you will eventually have to draw an income from this investment, the investment term is, in fact, longer than five years. All that will change in five years is that you will start to draw an income. With this mind, you may consider investing a portion of the capital in multi-asset funds that have a slightly higher exposure to the share market, or in a fund with a flexible mandate that can invest wherever the fund manager finds opportunities. It is imperative that you discuss this with your financial adviser so that he or she can explain to you the risks associated with a higher exposure to equities.
To ensure that your portfolio has the optimal diversification, I would advise that it has sufficient offshore exposure. Most fund managers currently have an offshore exposure of 25 percent.
Once you have to draw an income from the portfolio, you might consider including more income-generating funds.
Can I afford to retire early?
I am 53 years old and am thinking about taking early retirement at 55. My total fund credit is R3.3 million and is invested at moderate to high risk in shares administered by a well-known, reputable pension fund administrator.
If I retire at 55, should I buy a pension via this pension fund administration company, or seek advice from one of the smaller, personalised financial consultant firms?
Can you recommend an investment plan that will generate an income of R14 000 a month? I will also have to settle a mortgage bond of R800 000 from the R3.3 million fund credit if I retire at 55.
Name withheld on request
Anton Prinsloo, a financial adviser at PSG Wealth in Silver Lakes, Pretoria, responds: The wise thing would be to obtain advice from a qualified financial adviser. The large pension fund administration companies have their own advisers, who will advise you on your options if you were to buy a pension via them. It would be better to obtain advice about retirement planning from an independent adviser. You should look for an adviser who has the Certified Financial Planner qualification.
Fifty-five is a young age at which to retire. It means that you will have to live off your capital for a long time – 30 years if you were to live to the age of 85.
An amount of R2.5 million (R3.3 million minus R800 000) could provide you with an income of R10 420 a month. This is based on an income drawdown rate of five percent.
I cannot advise on a post-retirement investment plan without assessing your circumstances in detail. However, the most important component of an investment portfolio after retirement is diversification. This means that it should combine different asset classes that will ensure enough protection in volatile market conditions, as well as enough growth opportunities to provide inflation-beating returns over time.
The ins and outs of living annuities
Is it possible to purchase a voluntary living annuity, and if so, what legislation applies?
Val Geyer
Riaan Strydom, a financial adviser at PSG Wealth in Mill Park, Port Elizabeth, responds: A living annuity is an investment product designed to receive compulsory money (money from a retirement fund or another living annuity) and from which an income must be drawn. This income is legislated to be between 2.5 percent and 17.5 percent a year of the capital value and is fully taxable. The underlying investments are typically unit trust funds, and the income is derived from the growth and income distributions of the chosen funds. The investment falls outside your estate for estate duty purposes, and you can nominate a beneficiary to receive the proceeds upon your death.
Looking at the definition of a living annuity, you will see that it cannot be purchased with voluntary money. You would first have to invest in a retirement fund (retirement annuity, pension, provident or preservation fund), retire from that fund and transfer the proceeds to a living annuity. This means that you will forfeit access to your capital until your death and you will be limited to the income chosen on an annual basis.
However, the mechanism can be replicated for voluntary money by constructing a unit trust portfolio on an investment platform and drawing a monthly income from it; in other words, creating an investment that looks like a living annuity but isn’t really. The principles are exactly the same, that is, do not draw more income than the portfolio can generate and reinvest surplus income for capital growth that can facilitate future income growth.
Constructing a portfolio in this manner is also very tax-efficient, because the monthly “income” is not taxed. Tax is payable on the interest you earn and capital gains realised in the portfolio. You also have access to your funds in case of a financial emergency and can change your income level as often as required.
The investment will form part of your estate for estate duty purposes and you cannot nominate a beneficiary, so [unlike money in a living annuity] there will be executor’s fees to pay.
Transferring a property on death
My wife, son and I bought a house when I retired. The mortgage bond is in our names. I am now 80 years old and my wife is 77. What is the procedure if one of us passes away? Must the house be transferred into the names of the two surviving owners? What will this cost if the house is valued at about R1 million?
LJ Hillier
Braam Fouche, a financial adviser at PSG Wealth in Umhlanga Rocks, Durban, responds: You cannot assume that your wife and son will be allocated your share of the ownership; the current arrangement and the nature of the ownership of the property needs to be dealt with in your will. You must indicate clearly who should inherit your portion of the property and in what percentage, if you decide to divide the ownership.
Bear in mind that your marital regime might play a role. Spouses married in community of property have a 50-percent claim to the assets of the deceased before the will takes effect.
Your portion of the property will be an asset in your estate. In general, an executor will charge a fee of 3.5 percent excluding VAT. This would amount to about R13 300, if your one-third share is not subject to any accrual system.
Note that, even if you do not have a will, your estate would still need to be wound up by an executor.
If you nominated both your wife and your son correctly in your will, the executor can allocate your portion to them. The change of ownership of the property must still be registered in the Deeds Office. This is a separate legal task and is dealt with by an attorney, who will charge a fee to the estate. The costs will depend on the value of the transaction (the portion to be transferred) and other charges, such as Deeds Office fees and stamp duties.
Note that no transfer duty is payable when a property is transferred from an estate to the beneficiaries.
But there is another complication: a mortgage bond is registered over the property. The bond would have to be paid in full and cancelled by the attorney, or cancelled and substituted, if your wife and son are unable to settle it. The bond cancellation and its substitution, if necessary, would be accompanied by separate attorney’s fees, Deeds Office fees and duties. These could amount to between R10 000 and R40 000, depending on the bond amount.
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