Post-retirement savings - comparing guaranteed and living annuities
As you approach retirement you are faced with having to make
many important decisions. One of these decisions is the choice
of whether you purchase a guaranteed annuity or a living annuity with at least two-thirds of your accumulated pension fund or
retirement annuity capital. This decision will have a significant
impact on whether you are able to maintain your standard of
living during your retirement. Before weighing up these two
options, let's start off by defining them.
A guaranteed annuity provides, as its name states, a guaranteed
income according to the terms and conditions of the product.
This income is taxable and is determined by the amount the
insurance company pays you on the day that you retire and is
directly linked to long-bond rates. At the time of writing the
highest published guaranteed rate is 8.3% on a R100, 000.
That means that if you retired today you would receive a
guaranteed income of R8, 300 per year or R692 per month
for the rest of your life. The decision to invest in a guaranteed
annuity is final, once you have agreed to the terms and
conditions no changes will be allowed.
A living annuity (also know as an "investment linked living annuity
(ILLA)") allows you to select your rate of income between 2.5%
and 17.5% annually which is withdrawn from your capital and
which is taxable. You can amend this rate every year on the
anniversary date of your living annuity. Growth of your capital and When taking out a living annuity, you determine what your income
will be. The key to ensuring that a) your money lasts and b)
continues to grow at a rate above inflation is to keep your stipulated
drawdown to a minimum. The underlying funds in your portfolio
should provide the growth required but it is vital that you structure
your required income such that your post-retirement capital lasts
for as long as you are going to need it. A key benefit of a living
annuity is that when economic and market conditions change
dramatically (as they have done recently, you have the option to
adjust the income level and the asset structure accordingly, in
a guaranteed annuity you have no control over either of these
aspects.
Courtesy: PPS Investments - Nico Coetzee
Get Expert Advice on Level- or- Living annuities
Building a cash reserve - how much should this be?
Cash reserves are invaluable and serve as 'Plan B's' for the unexpected and rainy days. The common touted value/time on this is three months living expenses. While we appreciate that for many this is indeed a difficult number to attain and many of us might not have it now, it does not mean that it is something we should not be planning and setting aside for.
Is three months enough?
In the March Imara Asset Management newsletter, Mariette Leitch says that while three months sounds prudent and logical, it is not really a long time and a better guideline is to have at least six months to a years worth of living expenses set aside.
Leitch says we need a financial reserve because like life, financial life is subject to incredible highs and not so great lows, and to survive the inevitable bumps it helps to plan ahead. Six months of living expenses is "not a small number," but as she says there are ways to do it and it will also benefit you in the long run.
Some tips she gives to help build it up - a unit trust debit order, relook short-term policies to make sure you are covered for the correct value, and look at some daily expenses that can be cut back.
And if you don't use this cash reserve? This is just an extra amount to have handy for those retirement days.
Courtesy: MoneyMarketing
Resigned or Retrenched - Preserve your pension money Tax Free.
Preservation funds are designed to act as a temporary warehouse for withdrawal benefits from registered and approved pension or provident funds
Preservation Funds
- A preservation fund is a pension or provident fund, which has been registered with Registrar of Pension funds and approved by the SARS.
- It is a fund in which employees, who leave the service of a employer owing to dismissal (including
retrenchment) or resignation, or in the event of the dissolution of the employer's pension or provident fund, may invest their accrued fund benefits.
- The Income Tax Act changed during 2008 to also allow membership to
- persons to whom a pension interest from a ex-spouse's retirement fund was awarded;
- employees of an employer whose business was taken over by another employer in terms of Section 197 of the Labour Relations Act, 1995;
- members of one preservation fund who choose to transfer to another preservation fund;
- members or dependants who do not claim their fund benefits within 24 months of becoming entitled to it.
- A member's accrued benefit in a specific provident or pension fund may not be transferred to more than one preservation fund, but the benefits may be divided between a preservation fund and an RA fund.
- The following are retained (preserved) in a preservation fund until retirement:
- Accrued retirement benefits
- Completed years of service (in some cases - see "Years of service" later in this section)
- The tax-free pre-1 March 1998 portion with the Wealth Protector Preservation Pension and
Provident Funds
Get Expert Advice on Preservation Funds
GULLIBLE INVESTORS CANNOT RESIST INFLATED RETURNS
What would you say if an investment company guaranteed 2.5% per month on a fixed investment of R100 000? If you're a South African investor then chances are you'd haul out your cheque book and part with some of your life savings. And true to form, six months to a year down the line, you'd be knocking at the regulators door for them to intervene on your behalf. Despite the thousands of column inches devoted to educating investors on how to spot a questionable investment product, hundreds of investors fall victim every year.
We're not halfway through 2009 and a number of these so-called investments have faltered. Edwafin - which sold debentures through a number of financial intermediaries - was placed under provisional liquidation in May 2009. The first signs of trouble came in October 2008 when it failed to make interest payments to some of its debenture holders. At the time of liquidation the group assets of around R16.5m were offset by debts in the order of R228.5m. A month previously the Financial Services Board applied (FSB) to the high court for the liquidation of companies in the Corporate Money Managers stable. Their initial investigation into activities at the group "revealed serious liquidity and other problems in the business of the entities." And that from a company that operated in the money market space.
The best advice we can give is that you treat any financial opportunity that 'guarantees' excessive returns with utmost suspicion.
Don't get involved in an unlisted venture capital opportunity unless you've completed due diligence. Hasenfuss provides five commonsense steps in his article. Before you invest you should ask:
- Does the company have an operating track record?
- Have banks, investment companies or private equity partners already provided funding to the company?
- Are you buying new shares or shares already in issue
- What are the shares really worth
- How much commission is being earned on the sale of these shares
Courtessy: FAnews Editor
Asking the right questions will save you a fortune
|
