Decoding Retirement Funding

Retirement planning is a decades-long journey

Saving for retirement is a frustrating decades long journey and it can be hard to stay enthusiastic, especially when life happens. So-called forced saving (pension and provident schemes) in companies can be exasperating, especially if money is very tight at home, but in the long term, it can be your saving grace. More than ninety percent of people changing jobs cash in their pensions instead of preserving them or transferring them. With people changing jobs far more frequently than in the past, makes those pension pots appear smaller and inconsequential This retirement fund erosion is growing.

Retirement Annuities (RA) are the third major type of retirement saving – and can be used when you don’t have a pension/provident scheme, or want to top up your savings to the tax-allowed max. RAs have had a bad rap, in many cases for a good reason. I have been vocal about the shortfalls of these products, especially on an insurance platform – which is where they started. The way insurance companies paid their brokers commission prior to 2007 devastated the savings of anyone who had the temerity to stop contributing for any reason. They had this ‘early termination penalty’ clause where they could take 100% of the investment because they had paid the broker up to 27 years of commission, upfront on day one. This changed slightly in 2007, when they magnanimously agreed to ‘only’ take a maximum of 30% of old funds and investments in the last decade but this only applied if you held the investment for at least 10 years. Yay – not. Too little too late. 

The alternative, and the only one I will use, is a ‘LISP’ platform (Ninety-One for example) where advisor/planner/broker fees are paid as-and-when every month (averaging at 1% per annum). Some brokers using LISP platforms will also take ‘upfront’ commission (as high as 3.5%) – so look out for it. The problem with RAs has mostly been caused by the nasty fee erosion, not the fact you can only invest 30% offshore. There are advisory fees, platform fees, admin fees and fund fees. Fund fees alone can vary from 0.7% to over 3%. Retirement funding (RAs, pensions and provident funds) is one of the last tax-breaks you can get from SARS, so get your planner to illustrate that before getting sucked into the hype that only offshore investments are worth anything.

The sooner you plan out your retirement, the easier it will be to align your investments accordingly. You need to start getting an idea of when you want to retire, and how much you are going to need to retire and your desired lifestyle. The fashionable thing to do, popularized by authors like Tony Robbins, is to pay for a plan, then buy your own assets, especially if they are ETFS. There are plenty of planning outfits that will do that for you – with a plan costing between R15 and R50k. There is just one problem with that. The plan will be correct at that one point in time. But save a thought for when global economies change, and sometimes quickly, so that advice can go off the rails just as quickly, through no fault of your own. Plans expire and if you don’t have a planner incentivized to help you keep it up to date, it is not going to end well.

Getting the right plan

Doing your own plan is definitely an option if you have the skill set or are prepared to study for it. It just requires ongoing knowledge of local and global economies, sectors, asset classes, interest rates etc. There are a few dozen regulations you will need to get on top of but there is a (1500 page, very small print) book that you can buy every year to get that, which will also help you with the Tax, Estate duty, lumpsum tax etc you need to understand. There is quite a bit of Maths involved to do things like discounted cash flow, amortization and statistics. I have a couple of degrees, including an MBA, and the CFP® (Certified Financial Planner) qualification was extremely challenging. In my opinion, the ideal situation is to partner with a planner you trust. Remember to build the plan together and adjust it frequently to ensure relevancy. If you don’t have much that you can invest, and don’t have the need for a planner’s other services like life cover, then you might find it difficult to find a highly qualified planner who only looks after wealthier clients. Don’t worry; most brokers, advisors and planners these days at least have access to a decent computer app that will give you a semblance of a plan. Sure, it is going to be a bit cookie-cutter, but it is way better than nothing, and is usually ‘free’.

Ignore the hype and fear-mongering

There has been a huge outcry over the fact that Retirement Annuities can now only be taken offshore 3 years after emigration (which is now a SARS declaration, not SARB anymore). The argument is that people emigrating want to use those ‘savings’ to emigrate. This underlines the importance of having a plan and aligning your investments accordingly so that doesn’t happen. A plan can build in options and flexibility within your investments. You can still cash in pensions and provident fund ‘preservers’ (with nasty tax implications of course) so it is really only RAs that get stuck at this stage. Remember that government has wanted to change the law on cashing in pensions and provident funds for years – be warned. If you want to build in flexibility, then by using a LISP, you can stop contributing at any time without penalty (and divert those funds into building your emigration fund).

Ideally you should have a variety of different investment pots, each with a clear ‘objective’. That objective (say retirement, emigration, own business etc) will dictate HOW you invest that pot – what assets you use and whether they are local/global or both. Local can be very lekker when you are designing an investment to produce an income because we have fixed income assets with decent yields that are just not available in the US or Europe.

Contributions to retirement funds that have a tax break have been capped at R350k for a few years now, and my guess is that the government isn’t keen on increasing it any time soon. Endowments can make sense if your tax rate is over 30%, and there are also the Tax-Free Savings accounts (again, capped). Flexible investments aren’t hampered by offshore or other asset class quotas.
The first, and usually biggest, investment pot is going to be retirement, but you can have other pots going at the same time. The secret to successful planning is to know how big a pot needs to be for your given objective. This boils down to some simple Maths, but the assumptions and background discussions with your planner makes getting to a final number slightly more complicated. Keeping the plan on track and refining it as time passes is a journey best done with a partner.

 A retirement pot should be ring-fenced and invested differently to other funds. The reason you want to ring-fence this is so that you can control better for risk as loosing it all will severely impact your future lifestyle. Losing your retirement funds would mean that you have to work longer, sacrifice more or retire on less. Once you get to retirement you stop adding to the funds and start taking funds out. At this time, it becomes even more important to handle these prudently. Ironically, the much-maligned ‘Regulation 28’ which prescribes how pre-retirement funds are invested, does not apply to post-retirement when there is far more risk for the ‘pensioner’. This is not the time to be exposing all or most of the capital offshore because that has worked for the last 10 years. Remember market assumptions is the mother of all performance mishaps.