Use discretionary investments to save in retirement
There is no better time to start reading up on the ABCs of saving and investing for retirement than during July – National Savings Month. The Ultimate Guide to Retirement in South Africa, which was published recently, contains definitive advice on how South Africans, at all stages of their lives, can prepare for the day many of them fear most: retirement.
This will probably also be the day you will be the richest you’ll be in your life. You could receive lump sums from your pension fund, preservation fund, provident fund and retirement annuity funds, as well as severance benefits, accumulated leave and long-service cash awards, and other company bonus rewards.
It’s your and your financial adviser’s responsibility to safeguard your income so that it will last for the rest of your life. The choices you make at retirement could be life-changing.
You will have to revise your investment portfolio. Do you need to make lump-sum withdrawals to supplement your retirement income, or can you leave your capital to grow for a rainy day?
Investing in discretionary products allows you to establish an easily accessible emergency fund for unplanned expenses. Discretionary products also allow you to draw an income in the most tax-efficient way and reduce your tax liability during retirement.
It is advisable to avoid volatile equity markets when supplementing your retirement income with discretionary products. Instead, invest in interest-bearing or dividend-paying funds, or phase your investments into the equity markets over six to 12 months.
Investment products have become increasingly complex. The Ultimate Guide to Retirement in South Africa defines these products, and discusses their benefits and what to consider when balancing reasonable returns with appropriate levels of risk. Examples of investment products are:
Cash investments. Bank savings or term deposits enable you to access your money immediately, but they don’t provide adequate capital growth over the long term. A money-market account pools your investment with the investments of other investors to provide higher interest returns.
RSA retail bonds. Retail bonds are savings vehicles where your investment is loaned to the government. You earn a fixed rate of interest over two, three or five years, or a rate above the inflation rate over three, five or 10 years. Interest on these bonds can be paid out or reinvested.
Voluntary purchase annuities. These are similar to compulsory purchase annuities, but can be bought for a fixed period or until you pass away. The capital portion of your withdrawal is not taxed.
Income plans. The investment structure is similar to a living annuity in that you take the risk that your income flow will be sustainable. You select the underlying investment, such as a share portfolio, collective investment scheme or a custom-built portfolio managed by an independent asset manager. The term can be fixed or open-ended. You decide how much you want to withdraw every month.
Direct share portfolios. Electronic share trading has made it easier to invest directly on the stock market. It is advisable to diversify across at least 10 different companies to reduce risk.
Collective investments. Unit trust funds and exchange traded funds (ETFs) are examples of pooled investments. They provide small investors with an opportunity to invest in securities (equities or shares). ETFs track an index, or a basket of assets that resembles an index fund but trade like a security on an exchange.
Life assurance endowment (investment) products. When taken out at least five years before retirement, you are allowed to draw a tax-free lump sum or an income from a life assurance endowment. Beware of costs (penalties) and terms if you surrender the policy before the five years are up.
Property. An investment property should earn income from rent and capital growth over time.
Reverse mortgages. This is a mortgage bond where instead of the homeowner making payments to the lender, the lender makes payments to the homeowner. Beware of capital gains tax, because it can affect your cash flow.
Alternative investments. These investments require considerable skill and expertise. They include derivatives, hedge funds, private equity funds, and synthetic and guaranteed structured products.
Tax-incentivised venture capital companies (VCCs). Investors can claim the full amount invested in registered VCCs against their taxable income, but must stay invested for at least five years. Keep in mind that the capital gain when selling this investment will be the proceeds on the investment.
Exotic investments. Many investments fall under this category, such as rare stamps, gold coins or art, cryptocurrencies, currency trading and investing in shipping containers.
Wouter Fourie, the chief executive of Ascor Independent Wealth Managers, was the 2015/16 Financial Planner of the Year. Fourie, who has the Certified Financial Planner accreditation, is the co-author with Bruce Cameron (retired editor of Personal Finance) of The Ultimate Guide to Retirement in South Africa. The book has been acknowledged by the Financial Planning Institute for the quality of its content. For more information, visit www.retirementplanning.co.za. The book is available online and at book stores.