There are rules that everyone should follow every time there is a financial crisis, whether it is the Covid-19 pandemic and/or the continuing kleptocracy regime virtually wrecking the South African economy.
This week and next week will be the final columns in this series on security for pensioners. Both these columns give a summary of the previous columns and some extra information.
The ghosts of the latest events are going to be long-lasting. Investment markets are going to be volatile. You can expect increases in taxes, you can expect inflation or deflation and you can expect less income in the years ahead. It is best to take action now.
Here are the rules you should consider if you are already short of income or suspect you will be:
- Take action now: Pensioners are seriously at risk. Don’t wait until the disaster hits. Take action now if you feel your financial future is uncertain. To correct a current poor decision later may be very limited.
- Budgets: Do two budgets (if you have not done one). One for the year ahead to see what you will spend; and one into the future. They must include what you will receive and what you will pay out. Once you have the first year’s budget then work out a longer-term budget, taking into account future inflation rates of the things you expect might go up, such as healthcare bills, or down, such as not using a car. (More in next week’s column.)
- Pension structure: Check the structure of your pension. This includes:
- It may be well worth converting an investment-linked living annuity (living annuity) to a hybrid annuity, which has a guaranteed annuity as part of its structure.
- Guaranteed annuities will offer you guaranteed income that won’t be susceptible to the investment threats of a living annuity. The income gets better the older you are when you invest your savings.
- Consider risks to your pension, particularly the risks, including scams, and when you have a serious disease, particularly dementia.
- Enhanced (Impaired) annuity: If you have a lower life expectancy, a living annuity is often suggested that could allow you to withdraw as an income and/or leave more to beneficiaries. A living annuity is not the end of the story. You should first do a comparison with a traditional enhanced annuity that can pay out considerably more because of your state of health or lifestyle issues. The advantage of enhanced traditional annuities is that you can be sure it will pay out for as long as you live. With living annuities, if you live longer than expected, you will run out of money.
Enhanced annuities pay out when:
- You come from a low-income household with limited access to healthcare and proper nutrition.
- You suffer from a life-threatening disease, such as cancer, Parkinson’s disease, multiple sclerosis, diabetes, have had a stroke or heart attack. The stage of the illness is taken into account.
- Your lifestyle factors threaten your life such as smoking, drinking too much or being overweight.
You may even qualify for an enhanced annuity if you are in fantastic health, but your partner (in a joint and survivorship annuity) suffers from a severe disease, smokes, drinks and weighs a lot.
- Dread diseases: This is insurance cover with the payment of a cash lump sum if you suffer from a dread disease such as cancer, a heart attack, a stroke, a coronary by-pass operation. The policies differ on how much they will pay out and on what. Much is determined by what the assurer considers “activities of daily living”. There are also exclusions, such as claims for the consequences of smoking, drinking too much, taking drugs or committing suicide. There may also be a waiting period when the policy may not pay out. The money could be a life-saver in paying for things like nursing care or prosthetics.
- Bequest: Don’t bank on leaving money to your beneficiaries. You must consider yourself first otherwise you may not have money to live on and the beneficiaries will receive nothing anyway – they may well have to support you. Think about how long you may live — not on how soon you will die.
- Living annuities: Consider the risks to a living annuity. The main ones are:
- Point of ruin. Check at least once a year on your anticipated “point of ruin”. This is where you will reach the maximum allowable 17.5% annual withdrawal and your income will then reduce in rands, both in nominal terms and after inflation. A good check is against the Financial Sector Conduct Authority-recommended scales for living annuities.
- Sustainable. Pensioners normally need to look at sustainable investments which means the lowering of short-term volatility. You need to be assured that your investments are diversified, so if one fails another may improve. The more reliant you are on money from your living annuity the lower the overall risk should be. This often works the wrong way around on living annuities.
- Source of income: In current times it may be necessary to draw money from your lower-risk investments, such as income funds, and use the dividends from your higher short-term volatility risk investments (equities) protecting the price of the equities during a down market. You can change the underlying investments at any stage, unlike the drawdown rate where you are limited to the anniversary date. But be careful.
- Structured portfolios: Beware of structured funds, which promise (but not necessarily guarantee) a return linked to a named index. These products come in many forms and each one must be studied very carefully. You must accept that the fund can go belly-up and you will receive nothing. This has happened on numerous occasions even where the product has been underwritten by a major international bank.
Your investment is seldom in the quoted index but is covered by a variety of different, and often complicated structures, under-written by a third party, creating what is called counter-party risk.
Some of the problems include: dividends not being added into returns; there are cut-offs in the growth of the investments and often limits on the downside as well; costs are very seldom disclosed and they come off in many secretive ways; you are told that a third party risk (a bank or financing house) is underwriting the investments, but you are not aware of the contract between the issuer and the bank; and currency difference on foreign investments may or may not be included.
- Financial planners: In most cases, particularly if your affairs are complicated, it will help you to engage a financial planner. A planner will help you through all the issues on this list and prevent you from making silly mistakes, which all of us tend to do.
- Beware of scams: This is a warning repeatedly by made by the Financial Services Conduct Authority: “Members of the public should always check that an entity or individual is registered with the FSCA to provide Financial Advisory & Intermediary Services and what category of advice it is that the entity is registered to provide. There are instances where persons are registered to provide basic advisory services for a low-risk product and then offer services of a far more complex and risky nature. The FSCA again reminds consumers who wish to conduct financial services with an institution or person to check beforehand with the FSCA on either the toll-free number (0800 110 443) or on the website www.fsca.co.za as to whether or not such institution or person is authorised to render financial services”.
- Estate Planning: Deciding on to whom you will leave your estate is important all of the time, but even more so at a time of the Covid-19 pandemic. Ultimately it is possible that up to 60% of the population in South Africa could become infected. People aged over 60 have an increased risk of contracting the virus. You must accept that there is a risk of early death as a result of the virus. Things to consider in your estate planning include:
- Will: Your last will and testament must be checked regularly. It must be up to date. This means getting rid of beneficiaries who may be dead, or adding new ones, such as grandchildren or changing allocations.
- Lists: You should keep a list of all your assets and liabilities and let someone you trust know where they are kept. This includes such things as passwords for your telephone, your computer and your access to important websites, including your bank account and any savings you may have, and even the code for your home alarm system. And also give them a map to your stash of Krugerrands!
- Beneficiaries: Check that the beneficiaries you have named to a retirement annuity fund, your living annuity or a guaranteed annuity with a payment guarantee or a life assurance policy are correct. You should do this directly with the institutions (and not through any third party such as financial planners). Keep a written record of this as well and mention these beneficiaries in your will as a back-up.
- Important papers: You must keep a list of all your important papers from birth certificates, passports, marriage certificates, tax returns, to debit/stop orders. Your subscriptions to your contributions to medical aid, savings accounts, your internet provider, to charities, your gym, your telephones, television licences and TV subscriptions, your apps on your mobile phone and utility services to your home.
- Plan together: As a couple, you should do your financial planning together. It is important for you and your partner to know about what is included in all your finances. Reasons include:
- Trillions of rands are tied up in millions of unpaid beneficiary accounts, bank accounts and unpaid assurance policies and unit trusts in South Africa. The benefits have not been paid because no one knows who the beneficiaries are, despite extensive tracing. One of the reasons is that there is no linkage to the contact details of the beneficiaries that would allow a payout after the death of a person. You should regularly check and update your life assurance policies, your pension, your unit trust investment and any other investments. You need to ensure that you and your beneficiaries’ contact details, including addresses, telephone numbers or an email address are listed with the administrators of your investments.
- If you have separate financial advisers, get together with both of them so that a proper analysis can be made of your finances. You will probably find there are advantages that you may have lost out on by planning separately. Not knowing about your partners’ finances could cost you in the long run.
- Debt: If you are in debt, do everything to get out of it. Scrimp and save. Pensioners cannot afford debt. And when you have removed your debt save the same amount — until you feel you are financially secure.
- Wait: No financial investment ever made a loss until it was sold. Don’t sell an investment in fear. Sell it only with help, particularly from your financial adviser. There are reasons to change investments, but they must be done according to a well thought out plan where you are planning your future, not immediate reactions to what is happening at the moment. Cut out the noise!
- On your own: You are who you are; others are who they are. In other words, your financial demands and your living conditions are different from your neighbours. Don’t do something because somebody else has done it, particularly if your hairdresser gives you advice on the basis of what someone else has told them about investments.
- Emergency savings. You should try to save at least six months of income whether you are still working towards retirement or in retirement. It must enable you to live for a year on your “needs” income. BM/DM
Bruce Cameron, the semi-retired founding editor of Personal Finance of Independent Newspapers, over a number of weeks will look at the state of pensioners and retirement funds, which will highlight research undertaken by Alexander Forbes on retirement income in South Africa. Cameron is co-author of the best-selling book, The Ultimate Guide to Retirement in South Africa.