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Should I switch my living annuity fund?

My investment lost money recently – should I switch into a safe money market fund as soon as possible?
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I’m very worried after investing R1 141 000 of my Old Mutual (OM) living annuity into its Global Equity Fund A in mid-October 2017. It did fantastically over November, but it started going down at month end and I’ve now lost R83 000. This is the only living annuity I have for income, and I only draw 4.5% income per annum from it, and must try and preserve my capital with some growth as I’m retired. I know all about the stronger rand contributing to my losses too. But I don’t know whether to switch into a safe money market fund as soon as possible, to preserve what depleted capital I have left, or wait for my [fund] to recover my losses?

If I switch now, according to what I draw, [it] will give me no growth and possibly further deplete my capital, because it has reduced so much now. After consulting with many of them, OM advisors and managers can give me no answers on a way forward.

I’d welcome any news about a very real possibility of this SA Global Equity Fund of mine recovering the serious losses to my living annuity it’s made. If only it will recover, then I will be immediately out of this fund and into another more stable, lower risk one. And never will I trust global ones again, for sure. The ups and downs of it are just too much for my more stable mentality.

Angelique Visser - Baraza Wealth (Pty) Ltd

 

After working for 30 to 40 years, retirement is definitely an event that most people look forward to. Because one does not have to be at work all day anymore, retirement is often seen as an opportune time to travel, take extended holidays or engage in activities such as golf and tennis.

For most people, unfortunately, retirement is also the time when serious financial decisions have to be taken. As these decisions will have an effect on the rest of one’s retirement, it is strongly recommended that a detailed retirement plan is compiled, to ensure that all aspects are taken into account and informed decisions can be taken to ensure the best possible outcome for one’s circumstances.

A retirement plan should include the following:

A budget

A realistic budget has to be compiled to determine what one’s monthly income requirements will be after retirement. Often the amount is less due to the home loan having been paid off, but one should take into account that more funds may be required for increased medical costs and lifestyle changes, for example travelling and entertainment.

Calculate the capital requirement                                                                    

The amount required monthly and the period that this amount will be required after retirement will, together with factors such as the inflation rate and expected investment returns, determine what the capital amount is that one requires to provide the monthly income for the chosen period.

If the capital amount required is less than what one has provided for, which is too often the case in practice, the following may be considered where possible:

  • Adjust one’s budget (this may even result in a lifestyle change);
  • Do not rush into retirement; try to work longer; and/or
  • Start an income-generating hobby.

Statistics confirm that less than 5% of people can stop working at retirement and live off the amount that they have provided for up to retirement for the rest of their lives.

Formulate an investment strategy

This step entails a few actions and will also be unique to each person.

  • Retirement fund withdrawal

Decide whether a withdrawal should be made from one’s retirement fund and the amount if a withdrawal is made.

Currently at retirement one is allowed to withdraw up to R500 000 from one’s retirement funds without paying income tax on the withdrawal (total amount of all withdrawals). This amount, will however, form part of one’s personal estate after withdrawal and be subject to estate duty at a rate of 20% and not be projected against creditors.

  • Reserve fund

Set up a reserve fund to cater for emergencies and unexpected life events. The norm is to have enough funds available to cover one’s monthly expenses for at least three to six months.

  • Select investment vehicle

The two main products that can provide one with an income from retirement funds are guaranteed annuities – an insurance-type product, or a living annuity – an investment-type product. Both have advantages and disadvantages and the most suited should be selected for one’s specific needs.

  • Portfolio construction

One’s retirement portfolio should be constructed based on one’s age, risk tolerance and income goals. Normally a portfolio will be focused on income and capital preservation the older a person is. The result may be a lower allocation in equities, which won’t give one the returns of equities, but will be less volatile and will provide income to meet monthly income requirements. This, however, is not a blanket rule which is applied to every situation as the amount available at retirement will also play a significant role when a portfolio is constructed.

Investment fees should also be considered when a provider is chosen. The industry’s effective annual cost (EAC) standard requires complete disclosure and can guide one in this regard.

Once the investment strategy is adopted and implemented, one should stick to it despite changing market situations, as investment strategies are based on long-term views.

As explained above, a step-by-step process has to be followed when a retirement plan is compiled and an investment strategy formulated.

It will not be possible to advise whether a specific investment is suitable or not without having gone through the entire process.

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Unfortunately this writer made 2 mistakes which both compound his predicament he had an RA with OMSA and he invested his funds with one of their LA funds. He has been ripped off twice once with the RA and then with the LA as OMSA have horrendous fee structures. Why do I say that – because my RA (+20 years) and then for a short time my LA were subject to eye watering fees and yet they could not produce a reasonable return on the LA front. I saw the error of my ways and move the LA to company who were more pragmatic with fees. Thankfully I did not have as much “invested” with them so did not have to rely on the returns as my single source of retirement funds

The adviser basically regurgitated some standard comment completely unrelated to the question.

There is a flaw in logic here from an Asset vs Liability perspective. Living in South Africa, the future living expenses are rand denominated. You create a significant asset liability mismatch if the entire asset base used to fund these future liabilities is denominated in a foreign currency.

Being invested in a South African equity fund or multi-asset high equity fund will still expose the writer to risk of capital loss, but at least the asset base will be impacted by the same factors affecting the to future liabilities.

Being permanently invested in cash is a sure way to destroy the capital base and the long-term real return on cash is close to zero. Paying high fees on top of this exacerbates the problem.

What a bland reply. So typically “financial adviser”. Hopefully this is not his sole source of income. Agree with grahamcr, ripped off with fees. There is no rule that says you must buy your LA with the same company where you saved RA, shop around. With limited amount choose well and go “vanilla”, not so vanilla as MM however.

I am about to retire now and would appreciate any comments from readers or other experts concerning the wisdom of investing in an Index-based LA such as that which is provided by 10X Management fees below 1% and 11.6% performance for the year ending 31 December 2017(of their medium equity fund) appear to me to be particularly attractive.

If you haven’t talk to a couple of companies who do these types of pension/RA/LA investments – I moved my funds to Coronation’s Top 20, but my draw down is 2.5% (would prefer it that I didn’t have to drawn down) and I negotiated fees for their services

Equity funds will generally give one of the best returns as with risk there is reward. However going into a LA with funds that need to last you for the rest of your life and taking a risk of an equity fund may dwindle your capital if markets drop, you should be preserving the capital that you have and ensure your drawdown is not erroding the capital.

Liberty has a bold annuity with a guarantee starting at 80% of your units purchased, the guarantee is reviewed every quater and the guarantee can increase on these quaterly reviews. Having the guarantee means you can invest in equities and more aggressive funds that should give you a greater return and capital growth.

The fees for the guarantee works out to be only 0.2%pa over a 5 year period the lowest guarantee fee in South Africa. The platform fees and asset management fees can be well under 1%pa depending on portfolios of choice.

If you would like more information please email me glen.bebbington@liblink.co.za

Disappointed with reply as it does not really answer the question. I am in a similar situation. Own my own home, have a fixed deposit, an annuity and a flexible investment in unit trusts. The latter has been a disaster. My two property funds have last about 150 000 in value since December (Absa Global Property and Stanlib Property) and other unit trusts in equities and balanced funds etc about the same. Like the writer I don’t know which way to jump. The equities and balanced will come up. The property funds I don’t know as Resilient and sister companies are being investigated. I have tried to contact Absa and Stanlib but it seems fund managers do not liaise with customers. I have no adviser as my experience with advisers has been less than happy.

I would be horrified if my living annuity was put into a single fund. All your eggs should never be in one basket. Equity is volatile by nature, in an annuity you want a portion in something very stable that you drae from and the rest in something with growth potential.

It sounds like you need a new adviser.

Even worse, all in a overseas investing fund, very susceptible to the R/$ exchange rate…

Matthew M my living annuity is not in high risk funds, it is basically with Allan Gray Funds and similar. Unfortunately it is not enough to live on. My flexible fund which is money I saved while working for 45 years is in a range of funds some more high risk than others which all seemed to take a knock this year. I specifically mentioned the property funds, Stanlib and Absa Property Fund, which have given me nightmares. I should have been more clued up and been aware that both funds were invested in the same portfolios. Bad investment advice. My dilemna was whether to dump the funds and take the knock now or whether to hold on and hope for an improvement. Have decided to wait until tomorrow, Tuesday 20th. No longer have an investment adviser and do not intend getting one. I am 72 years old and am looking at moving my savings into fixed deposits.

I have two clients with some exposure to the Stanlib Property Income fund (down 21% YTD). I have advised both to be patient and not lock in the losses but there is no guarantee that they will improve in the near future.

Nothing wrong with LA.. it was probaly compulsory funds. Offshore fund not necessarily bad choice.. but would be wise to have just enough funds in a MM to provide annual income amount.. for atleast year or two.. to not sell units in volatile funds to provide income. All shares took a plunging.. ( not good to panic) It is about Time IN and not always Timing .. If you don’t have TIME .. then planning to play in volatile funds was wrong. The writer’s lowering value is academic.. but will be real if you switch now. VASBYT

Barry, yes do not panic. Have learnt the lesson.

A typical answer from bypassing FA. If that is the type of an answer I get from a financail advisor if I ask a question, I would find someone alse.

Some food for serious thought.

The suggestion that a ‘small/modest/fair/reasonable’ commission of 1% is appropriate is VERY, VERY misleading.

This is typical insurance smoke and mirrors.. aided and abetted by legislation.

The reality is ACTUALLY as follows:

If Portfolio = R5 million then 1% FEE = R50,000 PER YEAR!

So this seemingly ‘small/modest/fair/reasonable’fee actually represents a huge cost to the insured of R50,0OO-OO PER YEAR! Very, VERY nice pickings for the insurers and advisors… EVERY YEAR, YEAR AFTER YEAR! Lucky them.

Look how this impacts your investment return.

If Portolio growth = 10% = R500,000-00 and Fee = R50,000-00
The Fee = 10% (TEN Percent) of your capital growth!

Look at how this impacts income:

If Drawdown = 5% = R250,000-00 and Fee = R50,000-00!
The Fee is 20% (TWENTY Percent) of your annual income!!!

Looked at this way, you begin to realise that at 20% of your income per year this seemingly modest fee is highly lucrative for the insureres and agents. AND you pay income tax on the full drawdown, and cannot even claim the R50,000-00 as a cost of generating that income!!

After 10 years of feeding off YOUR pie, the insurers/advisors will have pocketed a massive R500,000-00 of YOUR investment returns!

I believe this is almost criminal, highway robbery of retirees, who are obliged BY LAW to invest in these HIGHLY LUCRATIVE products!

(PS * I strongly suspect also that the advisors’ primary motive for urging you to preserve your capital (by minimising drawdowns), is to preserve “the” pie that THEY feed off VERY nicely year after year, rather than out concern for you interests or security.)

End of comments.

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