A guide to retirement products – choose the best for you

In the past, planning for the ‘golden years’ was a simple exercise; people who worked for large companies were given a defined benefit pension on retirement, meaning they received a substantial percentage of their working salaries during their retirement years. It was a privilege to belong to these pension funds and it was affordable because retirees did not live for prolonged periods once in their golden years. Things are very different now; companies struggle to afford this kind of pension scheme, as life expectancy has significantly increased.

Fortunately, people today have a wide variety of retirement plans to choose from. Understanding the different products is vital, as choosing the wrong one can mean you miss your retirement objectives. Krisen Rabindra, National Sales Manager at Standard Bank Financial Consultancy has the following advice to help you understand the pension products better.

Company pensions

There are two types of savings plans that your company may offer you; a pension plan or a provident fund. A pension plan is a company-organised savings scheme that allows you and the company to save before tax earnings in a long-term investment vehicle for your retirement. When you retire, you may take up to one third of the value of the pension (of which a portion will be tax free and the balance taxed) that you can spend any way you wish. The remaining two thirds must be converted to purchase a recognised annuity that will pay you a monthly income. Alternatively, you can take the full amount as a monthly income.

A provident plan is similar to a pension plan; the major difference being when you retire you can take out 100 percent of the cash value. Better it seems, but it has less protection if the retiree spends this capital recklessly and does not protect this amount. The provident plan provides you with the flexibility to take out whatever cash amount you wish and invest the balance in a retirement annuity or living annuity.

While company pensions are a great idea, you can no longer rely on a single savings plan to secure your financial security. On top of this, many people also switch jobs and spend their retirement fund pay out, which creates a financial concern as they don’t accumulate a nest egg.

Retirement and living annuities

If you are self-employed or your company does not offer a savings plan, a retirement annuity (RA) should form part of your investment portfolio. Most people have heard of retirement annuities, and many are invested in them, but few understand what they are. The main difference between an RA and a company pension plan is that RAs are paid for by individuals who are self-employed or who work for a company that has no retirement scheme. In other words, they are individual, tax-deferred savings plans.

A retirement annuity gives you a guaranteed pay out for a specified period or for life. However, if you pass on early, the surplus could revert to the insurance company.

A living annuity is a unit trust portfolio from which you may withdraw five percent to 20 percent annually, but you should withdraw a percentage which is lower than the expected growth of the portfolio, leaving the capital intact. If you pass with a balance in this product, the funds become part of your estate. One must be careful when choosing between compulsory and living annuities, as they have substantially different meanings and outcomes.

Unit Trusts

The premise behind a unit trust fund is simple: individual investors purchase into a unit trust which is administered and run by a unit trust management company. The average investor does not have the funds to buy a spread of quality shares like a unit trust option offers, and a spread is important to reduce risk. With a unit trust, an investor can own part of a diversified, blue-chip portfolio by investing a modest amount of money.

Fixed deposit and money market accounts

These accounts are reasonably flexible and can provide a hedge when interest rates increase. There are many different variations of saving products and the person to best provide you with guidance and advise you on these, is a financial planner.

Endowment Policies

An endowment policy is a savings agreement with a life insurance company. The usual term of investment is five years. You can invest a lump sum of money, or you can invest on a monthly basis via a debit order. During the time you are invested, the insurance company will distribute your money across various assets, such as stocks, bonds, property and cash, and will handle any income tax liabilities before distributing net earnings to the policyholder.

Investing in the stock market

Time has shown that investing in shares in the stock market is one of the most reliable investment options available. Share prices fluctuate, so buying stock is not without its risks, but over the long-term, they generate good results.

Technology has given us access to information that used to be the exclusive domain of the institutional investors. Now we can research anything that sounds like a good investment with a computer or cellphone. But investing in the stock market without knowledge is risky, so you need to read a few books and perhaps attend a course or two. Standard Bank runs an excellent stock market course for beginners who are serious about trading.

SATRIX

One of the Satrix options is the Satrix 40. SATRIX 40 is an exchange-traded fund that gives investors access to the top 40 stocks on the JSE, which also make up the ALSI 40 index, the top 40 shares by market capitalisation. SATRIX allows investors to buy a single investment that is hugely diversified over the 40 largest South African listed companies. You can invest a lump sum or sign a monthly debit order for R500. The attraction of this fund is that you can invest in the JSE’s largest capitalisation companies and receive their average growth.

The benefit of SATRIX 40 is the non-performers automatically discarded, while strong growth companies are included in the index. This is a good investment for those who are risk averse, but still want to take part in the growth opportunities that the share market offers.

Government retail bonds

Government bonds are a low-risk investment; the capital and interest rate are guaranteed during the investment, and they offer a better rate of return than conventional banks. An added bonus is that the treasury does not charge upfront fees for the investment. Smaller investors can use the bonds to save for lifestyle objectives, such as retirement or education.

You can buy an RSA Retail Bond through the RSA Retail Bond website, the National Treasury, or from any Post Office branch, making it easy to invest. You can also choose the investment term to suit your personal needs from two, three or five years.

“You can mix and match retirement products to suit your needs, just make sure you get advice from a qualified professional pertaining to the correct retirement product that will suit your budget and your needs,” concludes Mr Rabindra.