HOW MUCH RISK FOR MY RA?
I will retire in five years. I am healthy and have built up a good sum of money in my retirement annuity. Should I limit my exposure to risky asset classes as I approach retirement, or should I have as much risk as possible? I want my money to be safe but also to sustain me once I retire.
Pierre de Bruyn, a financial adviser at PSG Wealth in Northcliff, Johannesburg, responds: Clients often ask us this question as they approach retirement. The answer lies in understanding the construction of an income-producing portfolio, which should consist of three broad categories of assets:
• Stable: cash and money market or bond instruments – normally about two years’ worth of household cash flow.
• Prudent: longer-dated investment instruments that will produce returns slightly above inflation. This should be between three and five years’ worth of household cash-flow, to act as a buffer to movements in the equity market.
• Long term: the rest of the portfolio should consist of local and offshore equities that will generate long-term growth over time. This part of the portfolio will be quite volatile, which is why the other two asset categories are required, to protect against having to sell parts of this portfolio when the market is in a decline.
We can assume that, before retirement, you will not need cash from your retirement investments. But, as you approach retirement, the portfolio should be slowly adjusted to cater for the prudent and stable parts of the portfolio. This should still leave a considerable amount of your investments allocated to the long-term element of your portfolio, which will provide growth to enhance the value of your portfolio over time.
The answer to your question is that you need to know which part of your retirement investments should be in shorter-term investments and which should stay in the growth/long-term portion. The process of determining how much needs to be allocated to each portfolio should involve a properly qualified financial planner, and the portfolio allocation should be done with his or her advice and assistance.
While your retirement date is a specific point in time, it is important that your money should be carefully managed in anticipation of the event, and there shouldn’t be any shocks to your finances at a time when many other things are changing permanently. My advice is to plan early and be prepared.
SHOULD I BUY BITCOIN?
I’ve heard a lot about Bitcoin. Is it a good investment?
Adriaan Pask, the chief investment officer at PSG Wealth, responds: We have seen an uptick in the hype surrounding Bitcoin. However, there are some challenges that need to be considered.
Bitcoin is not approved by the Financial Services Board as an investment vehicle, and it is not monitored by the South African Reserve Bank. There is no clear recourse if things go belly-up, because Bitcoin operates without a central authority (a central bank).
The value of Bitcoin has been three times as volatile as the price of oil and 11 times higher than the post-Brexit exchange rate between the United States dollar and the British pound, according to analysts from Credit Suisse’s global markets research department. Their research also pointed to other risks.
Bitcoin transfers are irreversible, so those who inadvertently enter an extra digit when trying to pay for something are out of luck. Users need a private key to access their Bitcoins, and that key operates like a password that cannot be reset. If the private key is lost or stolen, so are the Bitcoins that go with it.
Currencies are often considered to be investment vehicles and not investments in their own right. For PSG Wealth, an accurate assessment of an investment’s intrinsic value requires a linked cash-flow stream. This cash flow needs to be discounted and valued to determine whether the asset is trading below or above its intrinsic value. Without this assessment, we would contend that any allocation is highly speculative.
Bitcoins have been subject to sharp and rapid changes in value, rendering their value highly unpredictable at any given time. Also of concern is the fact that there are no specific licensing requirements for wealth managers in the case of Bitcoin.
We would be more comfortable to consider Bitcoin, in some shape or form, in the wealth management space when credible research and regulatory oversight is common place, as well as when wealth managers can be appropriately licensed and accredited. We may also consider it once a central authority takes responsibility for ongoing oversight, once illegal activity via Bitcoin can be traced back to specific accountable parties, and once the infrastructure is stable enough to administer larger volumes.
HOW WILL NHI AFFECT MEDICAL SCHEMES?
Does the National Health Insurance (NHI) scheme mean there won’t be a need for private medical schemes?
John Cranke, principal of Midlands Employee Benefits at PSG Wealth, responds: Although there is still a long, unclear road ahead, NHI could spell the end for medical schemes operating in the private healthcare sector, because NHI’s package of benefits (which are yet to be determined) will be offered to all South African citizens and medical schemes will be allowed to offer only complementary services. As a result, schemes will morph into providers of health insurance offering top-up/complementary benefit packages (for example, for specialised dentistry and cosmetic surgery).
In essence, the proposed NHI scheme will mean that everyone in South Africa can access health care, some of which may be via private healthcare professionals who are contracted to provide services on behalf of NHI.
The proposed “full” implementation date is 2025. Implementation is planned to take place in three phases, the first of which ended in the 2016/17 financial year. One of the key objectives of the first phase was the establishment of an NHI Fund, but this has yet to occur. The many challenges, including how NHI will be funded, the composition of the benefit package, and the lack of resources in the public healthcare sector, mean it is highly unlikely that the time frames will be met.
It is therefore advisable to keep your medical scheme cover, at least for the time being, so that your healthcare needs are adequately provided for.
WHERE TO WITH MY RETIREMENT SAVINGS?
I retired at the end of May. I am a deferred pensioner (I left my savings in the fund), because I have a commitment from my children to manage my day-to-day expenses to the end of December this year. I am debt-free, so I will need a small income after December.
Half of my fund value of just over R2 million is invested in the fund’s conservative portfolio and half in the money market portfolio. Should I leave the money where it is until the end of December, or should I buy an annuity now?
I want to invest the one-third of my fund value I can withdraw tax-free in a product that will guarantee my capital and generate an income.
Marius Cornelissen, a financial adviser at PSG Wealth in Menlyn in Pretoria, responds: It is generally recommended to stay invested until you need an income. The main reason is that all income distributions and capital growth in retirement benefits increase the value of your fund, tax-free. If you do not need any income until the end of the year, it would be wise to leave the money in the fund.
It is a common misconception that you can withdraw one-third of your savings tax-free. On retiring from your fund, assuming it is a pension fund, you are allowed to take up to one-third of the fund value as a lump sum, of which only the first R500 000 will be tax-free, provided you have not used this benefit in the past. Therefore, the full third is not tax-free, only the first R500 000.
In the case of a provident fund, you are allowed to make a full withdrawal of the total fund value, while being taxed at the retirement withdrawal scale.
Under the pension fund rules, you can invest at least two-thirds of the fund value in a living annuity, from which you are allowed to withdraw an income of between 2.5% and 17.5% of the value of the living annuity a year. Alternatively, you can buy a guaranteed annuity.
Any investments with a short time horizon should involve less risk, with a larger focus on interest-bearing instruments and lower equity exposure. Your current investments are quite conservative and thus reasonably positioned for someone on the cusp of retirement.
A guaranteed income from the one-third portion can be achieved with a guaranteed income product from a life assurance company or a fixed deposit from a bank. It is, however, important to remember that the term of the investment should be taken into account, because it could affect your liquidity needs.
Email your queries to [email protected] or fax them to 021 488 4119. This feature is sponsored by PSG Wealth.