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YOUR QUESTIONS ANSWERED

By PSG Wealth Time of article published Jun 2, 2020

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Retirement savings

I’m still earning despite the lockdown, but my retirement savings have depleted significantly. Is the money I had invested gone forever? I feel depressed to keep contributing and a little scared.

Name withheld

Pierre Puren, a financial adviser from PSG Jeffrey’s Bay, responds: It is understandable to feel this way during times of uncertainty, but focusing on your investment goals will lessen the probability of making an emotionally driven decision. Keep in mind that your monthly contributions are effectively buying more units or shares of the underlying fund(s)/ shares during times of suppressed markets (rand-cost averaging).

To illustrate, imagine a farmer goes to purchase 100 avocado trees, but the price has fallen 50% in the past month. He purchases double the trees for the same amount of money (your monthly contribution) and proceeds to plant them. During the following harvest, he yields double the produce from these trees, and so this cycle continues. Much like the farmer, so too will your future retirement savings bear more fruit (interest and dividends) from the additional “on sale” units/shares your monthly contributions have purchased when markets were down.

You could consider temporarily pausing your monthly contributions (ensuring this will not incur any penalties), but still make these contributions towards a voluntary or discretionary investment, ensuring access to capital if needed. Before the next financial year end (February 2021), you could use these accumulated savings to make a lump-sum contribution to boost your retirement capital, while (still) enjoying the tax benefit. Chat to your financial adviser if you aren’t sure what is best for you.

DIY investors

I’m a DIY investor in shares, and my capital of R1.2 million has reduced by at least 30% since Covid-19 hit our shores. Is there any way to put some protection in place when investing in shares?

Name withheld

Struan Campbell, a wealth manager from PSG Wealth Umhlanga Stockbroking, responds: Looking back at the calendar to Friday, February 21, we may have felt like things were going to be okay and that the market would somehow get through the pandemic, but the following three weeks saw the fastest 30% market decline in history. No equity market was spared; there was nowhere to hide.

Could you have avoided the losses? With hindsight, yes, you could have moved into gold and cash and would have made money through the crisis. As we know, getting that timing right is extremely difficult.

Other protection options are derivative hedging instruments, but for the retail investor these have to be monitored extremely closely, as they “mark-to-market” every day. If they move against you, losses can exceed the size of position taken for protection.

The best protection is diversification, holding quality companies across various sectors and geographies. As a South African investor with rands, having a portion of your portfolio offshore would have held up the rand value to a degree. Although significant losses were experienced in dollar terms in offshore markets, the dramatically weakening exchange rate, largely mitigated these.

Partnering with an investment professional will help to temper the risks, reduce your downside and keep your emotions in check. Markets do bounce back, and they can do it very quickly; at May 22, the JSE was up 35% from the low.

Retirement annuity

Can you access your full retirement annuity (RA) if you’re diagnosed with a terminal disease?

Name withheld

Jan van der Merwe, the head of actuarial and product at PSG Wealth, responds: You can access an RA due to disability through infirmity of mind or body. Accordingly, it’s not a given that you’ll be able to access these funds due to being diagnosed with a terminal disease. However, the illness may result in disability.

The fund’s rules will be considered, and the trustees of the fund may also apply their judgement and discretion in these cases.

The treatment of funds that you access as a result of disability will be subject to the normal tax rules and requirements that apply at normal retirement - that is, you have the option to take up to a third as a lump sum, with the rest having to be used to buy an annuity.

For the portion of the retirement fund that needs to be used to purchase an annuity, note that there may be some insurers that provide you with an “ill health enhanced annuity”, so it’s worth checking in with your financial adviser as to your best options.

Insurance 

Are hospital cash plans more affordable than medical schemes?

Name withheld

John Cranke, principal at PSG Wealth Employee Benefits Midlands, responds: Hospital cash plans are different to medical schemes. The latter are non-profit organisations regulated by the Medical Schemes Act (MSA), while hospital cash plans fall under the Long Term or Short Term Insurance Acts and are sold commercially for profit.

Medical scheme premiums only differ based on income and family size, while in the health insurance environment, premiums will be based on the insurer’s assessment of the risk and may differ from person to person.

The MSA makes it obligatory for all options on all medical schemes to cover the costs for Prescribed Minimum Benefits (PMBs, which include specific hospital treatments and chronic illnesses with no benefit limit) at full cost.

Hospital cash plans will pay only the specified benefits. Medical schemes reimburse healthcare services (provided they are covered by the specific plan) based on cost, while the health insurance products pay according to the benefit schedule applicable.

Hospital cash plans are generally cheaper, because they do not have to comply with the provisions of the MSA or cover PMBs. Across all medical schemes, the cost of covering the PMBs is in excess of R900 per beneficiary, but this gives medical scheme members complete peace of mind that they are covered in full for any serious (life-changing) condition or event. Hospital cash plans will only pay benefits covered per the benefit schedule, which could lead to potentially catastrophic financial shortfalls if treatment is needed for serious injuries or disease.

I would recommend medical scheme membership before a hospital cash plan for overall affordability in the long run.

Lost investments 

I’ve lost 30% of my investment portfolio so far this year, and I’m afraid of what losses may still lie ahead. Do I need a new investment strategy for the post-Covid-19 world?

Name withheld

Greg Hopkins, the chief investment officer at PSG Asset Management, responds: It is dangerous to change an investment strategy and particularly so during a crisis. This is because you are more likely to make mistakes and sell low when you have incurred losses and the future is uncertain.

We believe that the Covid-19 crisis introduces investment risks and opportunities. The lockdown has severely damaged the economy and the profits of many businesses. Most will recover, even if it takes a year or two.

When we look at what has happened to share prices, it is clear to us that the market has decided that most businesses will never recover. This provides an excellent opportunity for long-term investors. Selling at these prices and crystallising losses could have a very detrimental impact on your portfolio.

PERSONAL FINANCE 

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