My husband moved his retirement funds into a Liberty Evolve Pension preserver on the advice of his financial advisor. He moved it over in 2015 and it is literally making 2.5% interest annually. This is very low interest, is it not? This is all he has. What alternatives are available?
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Thanks for your query.
When assessing an investment, I like to differentiate between product and asset. The product is, broadly speaking, what determines your liquidity and the tax treatment of your returns; the asset is what drives your return, for example a bond unit trust.
Let’s start by looking at the product. At a high level, a preservation fund is a vehicle that allows investors to preserve (as opposed to cashing in or moving to an annuity) accumulated retirement benefits in a tax-efficient manner.
The product characteristics are, inter alia:
- Based on current legislation, no tax is payable within the preservation;
- Your asset allocation is governed by Regulation 28 of the Pension Funds Act;
- Most platforms allow for switching among funds during the investment term, to cater to changing risk profiles, market conditions and investment objectives;
- There is liquidity prior to retirement although any withdrawal more than R25 000 is subject to tax; and
- On death, the investment is not subject to estate duty or executor fees.
Let’s move on to the return. Your return is going to be driven by your asset allocation, which in turn is a function of the unit trusts/funds you incorporate in your investment. It may be that the product is fine, but your investment mix is not suitable for your risk profile and objectives.
At this point, it is important to talk about product and asset at the same time because the specific product your husband has forces you to have an allocation to the JSE Top 40 Index. The Liberty Evolve product range is premised on you investing either 40% or 60% of your investment into a ‘capped tracker’ portfolio which gives you the return of the JSE All Share Index (Alsi), including dividends up to your target return; the remaining percentage then gets invested in a choice of tracker solutions.
At the end of May 2020, the five-year return on the Satrix Top 40 was 2.93% per annum. I’ve chosen five years to broadly coincide with the investment start date you mentioned as 2015. With the Satrix return in mind and then deducting some fees it’s quite easy to reconcile your return up until now. The JSE has produced particularly low returns over the last few years.
So what can you do?
- The first step is to determine whether the current asset allocation is appropriate considering your investment time horizon, risk profile, your propensity to risk and other influencing factors. It may be that the timing of your investment was unfortunate but that you are in the right place.
- If it turns out that your asset allocation is not appropriate, you need to engage with your financial advisor and ascertain what options are available for you to switch and whether there are any costs or penalties to do so.
- If the answer to the above is not favourable, then you should look at transferring your preservation fund to another platform that is more closely aligned to your needs and objectives. There are quite a few options to choose from; broadly speaking, look for something that has efficient administration, fair pricing, and a good choice of funds with flexibility to switch funds as and when necessary. Check beforehand that there aren’t any costs or penalties when transferring to another provider; this shouldn’t stop you making a transfer, but is rather just a factor for you to consider.
The Liberty Evolve product most certainly has its place in the sun for appropriate investors; it’s marketed as a cost-effective platform with access to tracker funds that perfectly track your chosen index. My approach, and the approach of our business, has been to favour products that offer a high degree of flexibility when it comes to investment choice.
Good luck, stay safe, stay warm.