Single parents, especially women, need to be very strategic about their finances, writes Shaun Harris
Essentially there should be no difference at all between the investment needs of men and women. The problem in South Africa, however, is demographics, and the structure of society that gives a picture of vast discrepancies when it comes to investment for men and women.
And the big difference, says Carmen Maynard, MD of Liberty Asset Management and Liberty director, is the “huge preponderance of single-parent families in South Africa”.
“It’s a major difficulty, regardless of whether the single parent is a man or woman, but as it turns out, it’s often a woman in this country. And the difficulty is that people in this situation often have very little disposable income left to save after meeting the basic needs of looking after a family,” Maynard says.
Which leads to a subject Maynard feels very strongly about, given that single parents, particularly women who have to break employment when they have children, may often change jobs.
“I’m a vociferous advocate of a compulsory state pension scheme. The single biggest problem of the present system is that it allows pension fund members to withdraw their benefits when they change jobs.
“It’s very tempting for the member who may desperately need the extra money, but I think it’s criminal to allow them to do so.
“It just leads to bigger financial problems later on in life.”
Maynard does not believe the state should run a compulsory fund – that could be farmed out to private sector fund managers, as was the case in Chile when they introduced a compulsory government pension fund – but that employees should not have the temptation of being able to withdraw benefits when they change jobs.
If retirement benefits cannot be transferred to a new fund when the employee changes jobs, a preservation fund may be a better option than a less flexible retirement annuity.
But the worst option is to take the cash – apart from anything else, a huge chunk of the value of the benefit will be lost to tax.
Maynard believes that one important requirement for single parents is probably a higher need for insurance, both life and disability cover, than married people.
That may sound strange coming from a woman whose professional life has centred on equities as an investment, but it’s hard to argue against the need for insurance when there is only one parent responsible for children.
“My advice to a single parent would be to first make sure they are sufficiently covered against death and disability. When there is only one of you it is essential to provide for children if something happens.”
After that, says Maynard, single parents should ensure they have adequate medical cover.
“Most jobs will provide some form of medical aid, but it’s not always sufficient. Limits can easily be exceeded, so it’s worthwhile considering something like a hospital plan in addition to your medical aid.”
For a sole breadwinner the next essential is to try and clear all debt. Numerous studies have shown the value of long-term equity investments, but retiring debt probably still offers a more effective return.
If there is disposable income left after that, Maynard believes that unit trusts are probably the best investment option. “As long as people have an understanding of the long-term nature of unit trusts, I still believe it’s the best way to go.
“I don’t think there is any difference in the risk profiles of men and women – some people can take more risk than others, it’s not a gender issue – but even the cautious single parent could go into a balanced fund, say with 40% of the assets in fixed income and the remainder in equities.
“Some people have a blank when it comes to investing in the stock market, but the risk of not being in equities is that you may not beat inflation.”
Maynard says an investor should leave the decisions and the equity risk to a professional fund manager.
“Unit trusts are very transparent – investors can check performance on a daily
basis – but this also makes some people nervous. One result is that they tend to sell, and buy, at the wrong times.
“Rather let a professional manager run the investment, in much the same way that a pension fund manager invests in the equity market, though the members don’t necessarily see it.”
Apart from being transparent, unit trusts also have the advantage of being relatively cheap, with costs continuing to come down. Some unit trust funds will offer debit orders for as little as R50 a month.
Even in the case of low-income earners, say a domestic worker with a monthly salary of R1 500, unit trusts could be an option.
Maynard says the first stop should be a retirement fund product – some banks and life offices offer affordable retirement funds aimed at domestic workers – though she is also critical of the authorities for not offering employers who contribute to these funds the same tax breaks available to a group employer.
But unit trusts offer a flexible addition to retirement benefits.
“In my case I’ve been putting away a specified amount for my domestic worker for the past 15 years, on the clear understanding that the money cannot be touched until retirement.
“But there is space for other investments. My domestic wanted to finish paying for her house, which is also a good long-term investment towards her retirement, so we agreed on a unit trust contribution holiday to pay for the house,” Maynard says.