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Planning your pension

A reader asks:

I am a retired 61-year-old guy, married, with my own house and no debts. But I will have to invest wisely and conservatively for my family’s future. This latest equity crash has made me very, very gun-shy of the stock market. How then would you recommend I invest?

A Sunel Veldtman, director at BJM Private Client Services, replies:

It is important to grow your capital in real terms, because despite being ner-vous about the market, inflation is really your biggest enemy. If your investment growth does not keep up with inflation you will run out of money.

Growth assets in general are equities and property, and the important thing to focus on is the income you will receive from these assets because in the short term it is the income, not the capital value, that you need to depend on to meet your monthly requirements. Over the longer term the capital value will increase in line with the income/ dividends irrespective of short-term market movements.

Historically, listed property and equity have followed the growth in dividends and rental income over time, and it is very seldom that good companies’ and properties’ income decline. So while there may be periods of market corrections, the income/dividends paid are mostly consistent, providing a reasonable level of certainty for income purposes. It is also interesting to note that even after the 1987 crash — the biggest crash in the last 20 years — the market recovered fully within 18 months. If you do not need the capital as you are living on the income you can afford to wait it out.

You need to think of the market as a portfolio of good companies and not an entity with a life of its own. You can invest in good companies such as Anglo American, SAB Miller and Richemont, which are fantastic global companies, or you can invest in companies that will benefit from the government’s infrastructural investment plan. These companies will deliver dividend growth irrespective of their share price. History has also shown that good companies survive the bad times and continue to grow.

The secret of a good investment plan is balance and diversification — you shouldn’t have exposure in any asset class that will make you lie awake. It is also important to remember to rebalance your portfolio to maintain your diversification and balance. Also watch your costs, know what you are paying for and ensure that it is worth it. Larger financial advisory firms tend to have critical mass to negotiate good rates on behalf of their clients. Be careful of trying to time the market — people seldom get this right with both fear and greed impairing judgement. But you can enter the market over a period of time to reduce timing risk.

Finally, 61 is early to retire and not earn any income, so do an analysis of what you’re good at. It may be something that you’ve been passionate about but never had an opportunity to do, or try to use your knowledge and skills in a different field. It doesn’t matter how small it is, any supplementary income will allow your retirement capital to benefit from compound returns and will continue to help your retirement finances as well as keep you healthy.

HJ Henning asks:

I am going on pension at the end of October 2007. Any advice on where and how to invest the money?

A Jackie Govender of Metropolitan Odyssey replies:

As this is a broad question a summary of the options available at retirement will be discussed. It is recommended that the reader consult a financial adviser to do a retirement needs analysis based on his or her particular needs and objectives at and after retirement.

The rules of the retirement fund from which the member retires are important in determining the options available at retirement. Some retirement funds provide a pension to the member directly, while others allow the member to purchase an income from a compulsory annuity vehicle.

A pension fund allows the member to take a maximum of one-third in cash, a portion of which would be tax-free with the balance taxed at preferential rates, and the remainder of the fund value, being a minimum of two-thirds, must be invested to produce an income. A provident fund, depending on the rules, allows the member to take the full fund value in cash (with a tax-free and taxable portion) or purchase a compulsory annuity.

The following types of compulsory annuity options are available:

1. Conventional compulsory annuity

  • Annuity rates applicable at the inception of the investment will prevail throughout and determine the income that the annuitant initially receives, which may be paid monthly, quarterly or annually.
  • The income level chosen at inception will apply for the duration of the policy and could be escalating (fixed percentage) or level (no escalation).
  • There is a choice between single-life annuity (only annuitant receives income) and joint and survivorship annuity (another person continues to receive the annuity on death of annuitant).
  • A guaranteed term may be chosen — should the annuitant die within that term, the fund will pay his nominated beneficiary an income for the remainder of the term, failing which, the fund’s obligation to pay the annuity will terminate upon the member’s death.
  • The fund is obliged to pay the member an income for life and the risk is on the company providing the annuity to ensure that it has sufficient funds for this purpose.

2. Living annuity

  • Annuity rates are not applicable as in conventional annuities, because money is invested directly into investment funds chosen by the client, who bears the risk of performance affecting the capital.
  • The fund value is important in this vehicle, as it directly funds the income that is payable to the annuitant. Should the funds invested in perform poorly, it will have a negative effect on the capital available to provide the income required.
  • The annuitant chooses an income level at inception and may vary this annually, within certain prescribed parameters, as the level chosen is required to support an income payable for life.
  • Upon death of the annuitant, the nominated beneficiary may receive an income or cash, if commutation is allowed, depending on the amount of capital still available.
  • The reader is urged to seek timeous expert advice on his or her specific options so as to ensure as stress-free a retirement as possible. Remember, retirement planning is essential for a financially independent retirement

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