My investment has reduced by around R250 000 between February and March. I am 61 years old at the moment and still working up to the age of 65.
I was thinking of drawing the one-third from my retirement and investing it in an account that will give me 13.33% for 60 months to avoid losing more of my investment. This is my private retirement plan. At the moment I have a provident fund where I’m employed.
Please let me know your thoughts on this. The markets are volatile due to Covid-19 and my investment is decreasing so fast.
Your question is a common one that many investors are currently asking. From your question, we have assumed you are referring to a fixed deposit option that will provide you with a 13.33% per annum return over 60 months. To advise you on the best course of action, we would require a more holistic overview of your portfolio and your circumstances. However, we have set out some information below that will assist you in making an informed decision.
Understanding the 13.33% better
- As advisors, we always try and determine whether an investment opportunity is ‘too good to be true’. In the world of finance and investing, many investment opportunities arise which promise returns that are simply ‘too good to be true’ and need to be investigated further. When analysing an investment opportunity, we try to determine the investment’s real return, which is the return above the consumer price index (CPI) or inflation. With inflation sitting at around 4.4%, the offer that you refer to should give you a real return of nearly 9%. Even when investment markets and economies are experiencing good times, this type of real return is difficult to achieve, which begs the question: Is the offer too good to be true?
- Many institutions that offer fixed deposits do not use annual compound interest when advertising their returns. In many instances, there is a fine print which explains that the interest is calculated as simple interest on the deposit, and not annual compound interest. Our advice would be to read through the fine print carefully or ask your advisor to go through it with you.
- It is also important to bear in mind that our repo rate will affect your return, and there may be fine print indicating how the yield is linked to the repo rate. The South African Reserve Bank has just cut rates by another 1% and could cut again in the future due to the Covid-19 pandemic, and this could have an impact on your yield in the fixed deposit.
- Another factor to consider is that these are interest-bearing accounts and you could be taxed on your returns. Any interest above R23 800 that you earn in a tax year will be added to your taxable income for that year. If the 13,33% per annum return is, in fact, correct and you have no other interest-earning accounts, any amount above R178 545 that you invest in the account will attract taxable interest. This will have the effect of decreasing the net return that you receive from the fixed deposit.
Understanding the impact of retiring from your retirement annuity
It is important to bear in mind that the act of retiring from your retirement annuity will also affect the net impact of your financial portfolio as follows:
- Depending on the value of your one-third cash withdrawal, you could pay tax on this amount subject to the retirement tax table.
- The other two-thirds will need to be use-d to purchase a living or life annuity and, while you may not need the income, you will be forced to draw between 2.5% and 17.5% of these funds. These drawings will be added to your taxable income and subject to tax.
As is evident from the above, several factors need to be taken into account before making a decision, and that your decision to withdraw from your RA should not be based solely on the drop in your investment value or the returns promised by a fixed deposit. Our advice would be to engage with your financial advisor to more fully understand the fixed deposit offer and the implications it would have on your finances and to explore other investments options for your retirement annuity and the role this investment will play in your overall portfolio.