Your questions answered

WHY MUST I USE AN ADVISER?

My retirement annuity (RA) matured in June 2015. I advised the life assurance company that I would like to move my savings to Max Investments (Absolute Growth Portfolio) and increase my debit order.

After submitting the necessary forms, I was told that it’s obligatory that I consult with a financial adviser.

I do not have a financial adviser. Is it correct that my request cannot be carried out unless I obtain finance advice, even though I believe that I have made a good choice? I will be 65 in January 2016.

NA Munthree

Henry van Deventer, Head of Business Development at Old Mutual Wealth, replies: As you’ve experienced first-hand, there is a lot of inconsistency out there when it comes to how we can (or sometimes can’t) deal with investment products. Many product providers have chosen to make financial advisers an obligatory part of the investment process for some of their products. There are a few reasons for this.

First, some products (like RAs) have certain legal constraints when it comes to how you can access the money, what you can invest in and how you are taxed when you withdraw. Product providers make advisers a part of this process to ensure that these considerations are properly explained. They also limit their own potential liability for not informing you of these considerations.

Second, this dynamic is in play because of the commission structures many of these products have, whereby an advance payment is made to a financial adviser, for which the adviser is expected to perform certain duties.

We are, however, seeing some drastic changes in regulation, leading to more direct options becoming available to clients. Today there are products on the market that enable you to invest without involving a financial adviser.

You should be able to transfer your funds from an adviser-only product to an adviser-free product. Depending on the product, commission and the period invested, the costs and penalties for moving your funds could mean that the cost of making this change would be greater than what you would gain.

If you’re uncertain about what to do, it might still make sense to speak to a financial adviser for guidance. This might cost you money in the short term, but you might find that it saves you money in the long term.

SHOULD I RETIRE NOW OR LATER?

I am 64 years old. I have R3.3 million in a preservation fund and R500 000 in life assurance policies. I have shares and unit trusts to the value of R4.3 million. I have no debt. Each month, I invest R12 000 in unit trusts and R10 000 in shares.

When should I retire? I am self-employed and thoroughly enjoy what I do.

What monthly income could I expect if I retired at 65?

Name withheld

Francois le Roux, a financial planner at Old Mutual Private Wealth Management, responds: The rule that you had to retire from your personal retirement fund before the age of 70 was abolished years ago; you are under no obligation to retire. The longer you work, the more you will benefit from compounded returns.

You should retire from your preservation fund last, because you enjoy tax-free returns in the portfolio (including no withholding tax on dividends or capital gains tax), which provide this fund with superior growth potential. This, together with the fact that you have no debt and are making substantial contributions, will grow your retirement capital significantly with each year that you postpone your retirement.

You have good liquidity (accessible cash) in your portfolio, so consider making part of your monthly contributions in the form of a tax-deductible contribution to a unit trust-based RA, which will have tax benefits.

Many factors will affect your retirement income – for example, your income drawdown, the annual escalations (to keep pace with inflation) and the investment portfolio. A scenario can be modelled that takes all the variables into account.

As a rule of thumb, initially, you should draw down an annual income of not more than five percent of your capital. This will provide you with reasonable assurance that you will not outlive your capital.

WHAT DO I DO AFTER THE MARKET DROP?

In the past few weeks, the South African share market has gone down drastically. What changes should I be making to protect myself from this?

Desmond Otto

Henry van Deventer, Head of Business Development at Old Mutual Wealth, replies: These are indeed trying times for South African investors. Studies have found that investors react twice as emotionally to losing money than to making money, so it’s understandable that most of us are currently feeling a little anxious about our local markets.

It is important not to get distracted by short-term movements if we have a long-term strategy. Over longer periods – five years or more – more volatile asset classes like shares and listed property have historically given us the best chance for the best return. The price we pay for this long-term benefit is an increase in the ups and downs we see in the short term. Historically, the local stock market has given a negative return roughly once every four years, so what we are seeing now is not unexpected.

Things start going drastically wrong when panic leads us to cash in our shares or unit trusts after the market has gone down. This takes us out of the market when it recovers, which sometimes happens very quickly.

There is a simple truth to making a profit from investments that I remind myself of in times like these. A profit is made by buying something when it’s cheap and selling it when it’s expensive. The South African share market has been expensive for many years. Now that prices are lower, this rule of profit would suggest that it is the worst possible time to sell. For the astute investor, buying into the market at times like these makes a great deal more sense.

DO I INVEST OR PAY OFF MY DEBT?

Is it better to invest my spare cash, or should I rather use it to pay off my debt?

Bongi Morare

Henry van Deventer, Head of Business Development at Old Mutual Wealth, replies: Great question! Whether we like it or not (and I’m guessing the answer is ‘not’), the reality is that South Africans on average have some pretty staggering levels of debt. Of every R1 of disposable income that the average South African household earns, 79c goes to debt. At the same time, the level of personal savings in South Africa is negative and getting worse. This means that, as a nation, we’re spending more money than we’re saving.

In today’s environment, aggressive investors can expect average annual investment returns (after costs) of about six percent above inflation. This means that if inflation is roughly five percent, a reasonable expectation for a more aggressive long-term (more than five- year) average annual investment return would be roughly 11 per cent. So if I’m getting 11 percent by saving and pay more than 11 percent per year on my debt, the mathematics suggests that I’ll be better off by paying off my debt than by saving, as long as the interest rate on my debt is greater than the growth rate on my investment.

There is, however, a flip side to this argument. The reality is that most of us lack the discipline to start saving what we were spending on debt once our debt is paid off. We also find that the more access we have to our investments, the more we tend to withdraw and the sooner our savings will run out. This is why investing in something like a retirement fund continues to make great sense, even if you would be better off if you paid off your debt.