By Jaco-Chris Koorts, 10 February 2014
We all dream of having a carefree and financially healthy retirement. Unfortunately, for some of us, this dream never becomes a reality. There are a number of reasons for this, including:
It is generally accepted that, in order to receive an adequate post-retirement income, you have to save at least 15% of your annual salary income throughout your career. Of course, the later you start to save towards retirement, the larger this proportion needs to be.
So you’ve had a look at your budget and decided that you want to put away 20% of your salary each month to save for retirement. The next question, of course, is what is the best retirement savings vehicle to use?
It is easy to become confused by the myriad investment vehicles available in the market, each of which has its own pros and cons. Therefore, the best place is normally to start by looking at your company’s own retirement fund.
Most companies provide their employees with the opportunity to save for retirement by allocating a proportion of their pre-retirement salaries to the company’s dedicated retirement fund. The money allocated to this fund is deducted from the employee’s salary for taxation purposes, and there is normally a (limited) range of underlying investment options available.
But what if you are self-employed, or if your company’s retirement fund only allows you to allocate a proportion of your salary up to a specified maximum (e.g. you would like to allocate 20% of your regular salary towards your retirement savings, but your company only allows you to allocate up to a maximum of 15% of your salary)?
In this case, a Retirement Annuity could be the answer.
The Retirement Annuity (RA) has the following characteristics which make it the ideal retirement savings vehicle:
Does this sound too good to be true? Asking yourself where’s the catch? Well, one thing to remember is that by investing in an RA, you are “locking in” your investment until normal retirement age. So the soonest you can withdraw anything from the fund will depend on the fund rules, but this is normally age 55. However, this is also not necessarily a bad thing, as you do not have to exert the self-discipline required not to touch any funds earmarked for retirement, which can happen so easily in a discretionary investment when times are tough.
So now that we’ve determined that an RA is a good vehicle to use for funding retirement savings, the focus must shift to which RA to use.
There exists a miss-perception that RAs in general provide below par investment returns. This is not necessarily the case, especially if you look at so-called new generation RAs.
The features of a new generation RA include:
These products can be purchased from most asset managers, certain life insurers as well as Linked Investment Service Providers (or LISPs). Whether or not you buy the product directly from an asset manager or from a LISP will have little effect on the product’s structure, but it does significantly affect the underlying investment options available to you.
If you decide to purchase an RA directly from a specific asset manager, you will only have the option to invest in a range of unit trust funds from that asset manager, or a limited range of unit trust funds from a few accredited asset managers.
On the other hand, if you buy an RA through a LISP, you get the following advantages:
The growth in the sales of new generation RAs through a LISP has been phenomenal, and we expect that the LISP RA market will surpass the life insurance RA market in the following five years, based on conservative estimations, which is amazing if you factor in the relatively short time that the LISP industry has been around.
The investments underlying contractual savings products, under which the RA is classified, are governed by regulation 28.
Regulation 28 restricts the maximum exposure that you can have to certain asset classes:
Now that you have arrived at retirement age in top financial shape, having worked hard for your money, it’s time to let your money work for you. However, once again, you’re faced with the daunting task of deciding which product will best suit your needs.
In the current financial market, you have a choice between two major product classes: a guaranteed life annuity (GLA) and an investment linked living annuity (ILLA).
A GLA has the following characteristics:
An ILLA has the following characteristics:
As with RAs, there has been tremendous growth in the amount of ILLAs sold within the LISP market, because of their transparent design and the investment and income freedom they provide.
The intention of this article is not to provide financial advice and clients are urged to seek financial advice from an accredited financial intermediary.