I want to transfer from my preservation fund to a living annuity and I want to see how the different funds compare return-wise over five years and whether one requires a financial advisor for each investment. Is such a report available?
Please note that the information provided below does not constitute financial advice; in fact, we are precluded from giving specific advice. Generic information has been applied given the context of your question. We have very limited details about you and your circumstances – such detail may impact any advice provided.
The most common reason a person retires from a preservation fund is to convert the investment into an income-producing asset. On the basis that this is the reason that you are retiring from your preservation fund, there are a couple of things to consider before transferring to an annuity, inter-alia:
- How much cash, if any, should you withdraw – taking into account your future liquidity requirements outside of this investment?
- What, if any, are the tax consequences of taking a withdrawal as imagined above?
- Is a living annuity or a life annuity the correct product to use? Perhaps a blend of both products makes sense?
- Do you know the living annuity rules (income levels, tax rates, options on death and so on)?
Moving on to the guts of your question, you are not compelled to employ a financial advisor to assist with the transfer of your preservation fund to a living annuity. On the basis that this asset is going to provide some, or all, of your retirement income, or perhaps provide a legacy for your children – then, in my opinion, it would make sense to get professional assistance.
An advisor can help you choose the correct product provider, guide you around a sustainable level of income that has a low risk of running out, and provide input around an appropriate investment strategy and mix of funds to meet your needs. Using an advisor will come at a cost, which could be offset by the advice itself, and the safety and peace of mind it gives you – as well as steering you to platforms and funds that are cost-efficient.
As it stands, I think there are more than 1 500 different unit trusts in South Africa that cover different geographies, currencies and assets classes (cash, bonds, property and equity). There are a host of resources to get information on these funds. You can find a lot of easily accessible articles and content by doing a quick Google search. There is also a host of information on Moneyweb.
Getting the information is the easy part. We would caution against picking funds purely on performance; simply picking last year’s winners or losers (the school of thought is that the losers are the likely next winners) is not a fund-selection process. Choosing funds this way may also leave you with a group of funds that are completely inappropriate for your needs and risk-profile. This is your hard-earned money that cannot be recreated and thus it is very important to make a well-thought out, informed decision.
Discovery Invest did some analyses recently, where it looked at the probability of how many funds that had first-quartile performance over five years (2009-2013) would have first-quartile performance over the next five years (2014-2018), with the outcome being a 6% chance. Discovery Invest also looked at the probability of funds that had fourth-quartile performance over a five-year period (2009-2013) having first-quartile performance for the next five years (2014-2018); interestingly the outcome was also only a 6% chance.
There is no hard and fast rule that says you can’t pick unit trusts on your own, but having a rigorous due diligence process (yours or someone else’s) makes a lot of sense in trying to avoid calamities. There is something to be said for the importance of avoiding the ‘losers’. Selecting funds for a living annuity is usually a little trickier than a long-term buy-and-hold asset, as the blend of funds and the resulting asset allocation needs to support your initial income level, provide growth so your income can keep pace with inflation, and give your annuity the best possible chance of success.
When you are in retirement, you do not have a chance to fix any of your past mistakes. For example, if you’re 75 and realise you’re likely to live for another 20 years, but you’ve been taking too much income and invested incorrectly, there is little that can be done. This doesn’t have to be seen as a prophecy of doom, but more gentle coaxing to encourage you to take the time to make good decisions, with a positive impact now as well as in your future.