News & Insights

Your worst retirement fears, answered.

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By Sygnia

Picking the best retirement annuity is no easy task, especially if the answer to all your questions is befuddling financial-jargon. We invited 20 to 30-something-year-olds to share what concerned them the most about retirement annuities (RAs).

 

Question: “I haven’t got an RA yet. Is there time, or am I going to eat dog food when I’m old?!” 
Kuhle Themba, 35, English teacher

Answer: The most important thing to realise is that when you are doing nothing to save for retirement, you are in fact making a decision – to do nothing. So if you continue as is, you will end up dependent on state benefits, which may only (just) cover the cost of dog food.

Take a deep breath, do your research and start saving today. Even if you decide an RA is too complex for you at this stage, visit Sygnia’s website for guidance. Sygnia RoboAdvisor is a free financial planning tool that will assess your current financial position in detail and tell you how much you need to have saved to retire comfortably. There is no obligation to invest with Sygnia. Just start by educating yourself about your personal financial position, and by going through that process, you start taking responsibility for your financial health.

 

Question: “I'm using my bonus to set up an overdue RA…What are the risks – or benefits – of going with a smaller player like Sygnia, as opposed to going with one of the big guys?” 
Tallulah Habib, 30, Content and social media manager

Answer: To give you peace of mind, Sygnia manages and administers over R184 billion in assets. Sygnia has been around for over 10 years and although less known by the man on the street, it is well-known to large retirement funds that invest in its products. The money you invest is your own, and it is legally protected and ring-fenced as such.  There is a lot of regulation around savings products to ensure that. Hence there is no risk that it will be lost because you have chosen a smaller player.

The main difference between Sygnia and many of its competitors is costs.  Because Sygnia is a fintech company and has modern systems, it can offer the same products as the large industry players at a fraction of the cost. And that translates into a much bigger saving for you.


Question: “What is a retirement annuity anyway? And what’s the difference between that and another kind of investment, like a unit trust?”
Lucille Dawkshas, 34, High school teacher 

Answer: An RA is a savings product which allows you to save for retirement in a tax-efficient manner. When you invest directly in a unit trust, all your income earned is taxed at your marginal tax rate. When you withdraw your money, any profit you make will be subject to Capital Gains Tax (CGT). But, if you invest into the same unit trust through an RA, your contributions (up to 27.5% of your salary per annum) are tax deductible and all your returns are tax free. The only restrictions are that you cannot withdraw your money from an RA until you are 55, and the investment must be compliant with the Pension Funds Act, Regulation 28. You can save as much, or as little as you wish, depending on your personal circumstances.

 

Question: “Why do people say an RA is an expensive investment choice?”
Kuhle Themba, 35, English teacher

Answer: Short answer? Fees. Long answer? There are broadly three layers of fees you may end up paying, so be aware.

The first is the administration fee for the RA. This will vary depending on the company you select to invest with. Some companies charge both an initial fee, as well as an on-going administration fee. The average administration fee is approximately 0.50% per annum.

The second layer of fees is the investment management fee, which is charged by the asset manager you have selected. These fees are deducted from the underlying unit trust investments. The fees may be a flat amount, or may include a performance related element which is difficult to determine upfront. The average management fee can vary between 1.20% per annum, to as much as 3% per annum.

The third layer of fees is the advice fee you pay to your financial advisor. Advice fees are typically between 0.65% per annum to 1% per annum, but can be negotiated.

So in total, you may end up paying up to 4.5% per annum in fees. In fact, the National Treasury published a report in 2013 which pointed out that: "A regular saver who reduces the charges in his retirement account from 2.5% of assets each year to 0.5% of assets would receive a benefit 60% greater at retirement after 40 years.”

So look very closely at the fees you are paying and negotiate!

There are also companies, such as Sygnia, which offer RAs with no administration fees (when you invest into Sygnia-managed unit trust funds), free robo-advice and only charge a basic management fee. So if you do adequate research, you can invest in a retirement annuity from as little as 0.40% per annum.

   

Question: “If the whole market fails like it did in 2008, is there a risk I’ll lose all my retirement savings? What guarantees do I have?”
Natasha Johnson, 35, Freelance graphic designer

Answer: You are 35 years old. That means that you will only retire in 30 years’ time. That is a reasonable period by any standard. Even if the market crashes like it did in 2008, it’s likely that only a portion of your money will be affected. And you will have plenty of time to recoup your losses. Also, if you invest in a diversified portfolio of investments, your losses are unlikely to be as large as the collapse of the stock market. In 2008, the stock market lost 23% of its value, but an average RA portfolio only lost 12%. In 2009, the same stock market rose by 32%, and an average RA value rose by 20%. With long-term savings for retirement don’t pay too much attention to short-term movements in the stock market.

   

Question: “I’ve heard once you’re in an RA, you’re stuck – you have to pay a fee to get your money out early. Why’s it so restrictive? It puts me off.”
Aaniyah Omardien, 38, Marine conservationist

Answer: Unfortunately (or maybe fortunately), you cannot withdraw your money from an RA until you are 55.  After all, the aim of an RA is to ensure you have made adequate provision for your retirement. It may feel like a bother now, while you are quite a few years away from retirement, but you’ll definitely reap the benefits later.

You can, however, stop paying contributions and can also move your RA to another provider should you wish to do so. If you were invested in one of the old style RA typically sold by life insurance companies which offered “guarantees” and other bells and whistles; you are likely to be charged penalties if you want to move to another provider. The new generation RAs, which are offered on an Investment Platform, can usually be transferred without incurring penalties.

There are no penalties or fees when you reach the age of 55. You may withdraw a maximum of one-third in cash (a minimum of two-thirds of the capital must be used to purchase a post-retirement income from a registered insurer, such as a Living Annuity). Should the proceeds be less than or equal to R247 500, you may withdraw the full amount in cash.

 

Question: “What happens if I can’t keep paying every month – do I lose my investment?”
Aaniyah Omardien, 38, Marine conservationist

Answer: Not at all. You can save as much as you can afford, and you can suspend paying contributions at any time. All the savings you have accumulated to date remain intact and continue to earn investment returns.

 

Question: “I’ve heard you lose a whole whack of your savings to tax when you retire. Is that true?”
Aaniyah Omardien, 38, Marine conservationist

Answer: Like all things in the financial industry, it’s a lot more complicated! After the age of 55, you can take up to one third of the money you saved in your RA out as cash – that money will be tax free up to R500 000. Anything over R500 000 will be taxed. The rest of the money in your RA will have to be used to buy an annuity, which will provide you with a monthly pension. That pension will be taxed just like any other income.

 

Question: “Do I have any control over how, or into what my money is invested in? If not, why?”
Lelethu Tokwe, 37, Artist & musician

Answer: Let’s be clear: you have full control. The only restriction is that, if you invest in an RA, you need to invest in a diversified portfolio of investments that are “Regulation 28 compliant”. However, within this portfolio, you can select your preferred unit trusts or Exchange Traded Funds (ETFs), you can pick the asset manager you like and trust, and you can make a selection between different RA providers. If you want more control, you can even select how much you want to invest in equities, bonds and cash, and how much to invest domestically versus internationally.

Many people like to use financial advisors to steer them through the process of making decisions and therefore feel like they have no control over the outcome. That is not true. If you do your research and stay well-informed, you can make all the decisions yourself.

 

Question: “If I die before – or shortly after – I retire, what happens to the money?”
Lelethu Tokwe, 37, Artist & musician

Answer: If you die before you retire, the money in your RA will be distributed to your dependants and/or nominated beneficiaries. If you die after you retire, what happens to your money depends on how it is invested. If you invested the money in a Living Annuity it will also be distributed to your nominated beneficiaries or to your estate if you didn’t nominate a beneficiary.  If you opted for a Life Annuity, which pays you an income for life, then the income ceases on death even if you have not “used up” all the money you have invested (except if you have nominated your spouse to continue receiving a portion of that life annuity income).

 

Question: Why do I have to pay a broker an on-going fee – they only sell me the policy once?”
Lelethu Tokwe, 37, Artist & musician

Answer: The short answer is, you do not. You can choose to pay an advisor a once-off fee for the advice and nothing more. If, however, you want to receive ongoing financial advice then you can contract a financial advisor on an annual basis. The financial advisory fee will then be deducted from your savings automatically. So make sure you are clear and up-front about what you want. Many less scrupulous companies will try to foist an in-house financial advisor on you. Do not agree to that. Check all the documentation carefully and cross out all references to financial advice if you do not want it. If you want to access decent financial advice, always use an independent financial advisor. And always remember that you can negotiate the advisory fees.

 

Question: “I’ve read a lot of criticism regarding actively managed funds, in that the fees charged end up eating most of your growth in the long term. Why go for that when passive funds give you market-related growth anyway, but with much lower fees?”
Wogan May, 27, Technical consultant

Answer: The criticism on actively-managed funds you have encountered is fairly accurate. Actively-managed funds aim to beat some sort of benchmark. Usually this is a market index. The reality, however, is that there is no guarantee that actively-managed funds will actually achieve this. The main reason active asset managers charge higher fees is because they have to physically analyse and decide upon which companies and stocks to invest in, in order to beat the benchmark. When you invest in passively-managed funds (also known as index-tracking funds) on the other hand, you are buying a basket of shares that tries to match the performance of an index as closely as possible. These are known as 'passively-managed' funds because there is no fund manager making active decisions about which stocks to buy or sell. The fund simply tries to mirror the index. This makes passively-managed funds very cost-effective, as there is no need to employ highly-paid analysts and portfolio managers. Trading costs are also kept low because index trackers only have to buy or sell shares when the index changes. How much you pay is one of the few things that you can control as an investor, and it’s self-evident that higher fees will erode returns over time.

 

Question: “What are the relative benefits of an RA vs a Tax-Free Savings Account?”
Duane Jethro, 34, Postdoctoral scholar

Answer: An RA is a savings vehicle designed to provide you with an income when you retire.  A Tax-Free Savings Account (TFSA) is a discretionary savings vehicle, which you can use to supplement your retirement savings, but also to save for any other purpose.

In terms of access to money, this means that if you invest in an RA, you can only access your money when you turn 55, but you can withdraw from your TFSA at any time.

Both savings products enjoy a tax-free status on investment returns. However, unlike your contributions to an RA, your contributions to your TFSA is not tax deductible. Your contributions to a TFSA are limited to R33,000 per tax year with a total lifetime limit of R500,000.  There are no limits to how much you can contribute to an RA, although there are limits to how much you can deduct from tax.

 

Question: “What are the benefits of an RA over using a tax-free investment allowance to invest offshore every year?”
Tallulah Habib, Content and social media manager

Answer: The two issues are different. An RA is a savings product which offers a tax-efficient way of saving for retirement.  Your contributions are tax deductible and your returns are free of tax. However, you can only invest 30% of an RA offshore.

The use of a tax-free allowance is part of an investment decision – once you have moved money offshore you have to decide where to invest it. There are no tax benefits to this investment whatsoever. In terms of your tax-free allowance you can take up to R10 million offshore, but that money cannot be deducted from tax and your returns are fully taxed in South Africa.