Personal Finance columnist, Magnus Heystek, who is deputy chairman of the Citadel financial services group, was one of the main speakers at the recent Syfrets Private Bank/Saturday Argus Investors Club meeting. He spoke about the enormous complexity of retirement for everyone. This week we publish an extract from his speech. Heystek and Personal Finance Editor, Bruce Cameron, are the joint authors of the recently published best selling book, Retirement The Amazing and Scary Truth.
CHARLENE CLAYTON
By understanding the enormous changes taking place in the South African investment market, you can plan better for your retirement.
You need to understand the threats to your financial well-being so that you can make informed decisions, Magnus Heystek, deputy chairman of Citadel Investment Services told members of the Syfrets Private Bank/Saturday Argus Investor Club recently.
"If you plan for the future, you will at least have a future," he says.
Some of the changes which Heystek says you should be aware of include:
Retirement Funds
The move from guaranteed defined benefit to defined contribution funds started about 15 years ago. Under a defined benefit retirement fund you are promised a certain pension which is guaranteed by your employer. But actuaries worked out that there was a pension time bomb ticking in this country and many companies would be bankrupted by these guarantees.
Pressure for a move to more flexible provident funds also came from unions. Because of labour mobility, union members were losing out on retirement benefits because of the heavy penalties for terminating their membership from a fund early.
So defined contribution funds came into being in which the investment risk moved from the pension fund or company to you, the employee.
A recent South African survey indicates that a surprising 94 percent of retirement fund members opt for defined contribution funds and say no thank you to guarantees offered to them.
This means that they have to shoulder the investment risk. This is surprising because many people are not able to make the necessary investment decisions, says Heystek.
The latest development in defined contribution funds is that more flexibility in investment choice is being built into them.
This, set against a backdrop of volatile markets, makes it increasingly difficult for individuals to make investment decisions.
Taxation
Few people realise the impact of the increase in taxation on retirements funds from 17 to 25 percent (announced in the last Budget) on their retirement capital.
Effectively, it reduces your retirement capital by 20 percent and translates into a reduction in the growth on your retirement capital of 1,1 percent year.
"The government is hostile to pension funds and is looking for easy sources of capital," says Heystek.
"Tax planning loopholes have been changed over the past couple of years and mechanisms for reducing your tax have been closed one by one," he says.
Also, existing allowances, which are there for you to legitimately reduce your taxes, have been unchanged for many years and have lagged behind inflation.
For example, the R120 000 tax- free amount that you can withdraw from your pension fund on retirement has not changed for about 11 years.
So, by simply doing nothing, the government is increasing the tax on your retirement funds, says Heystek.
Changing investment industry
The investment industry in South Africa itself has changed significantly since five or 10 years ago when it was dominated by a few large assurance companies.
The change has come about as a result of consumer pressure with demands for greater transparency on costs and investment performance.
Old Mutual and Sanlam are now referred to as financial services companies and their dominance has been eroded by the unit trust industry.
Greater choice of products
Over the past 10 years, the number of unit trust companies in this country has escalated from 24 to about 200 and it could reach 500 quite soon.
There are now a whole range of new products such as funds of funds, linked products, guaranteed products, wrap funds, hedge funds and warrant funds from which to choose.
And to confuse you even more, last July offshore investments became available to South African investors.
This means there are now 30 000 unit trust funds and the "dart board is getting bigger and bigger".
Over the last 12 months movements on world currency markets have underlined that South Africa is a small, commodity-based country with a fragile currency.
The lesson for South Africans has been that failure to diversify into offshore investments is a losing strategy.
Changing nature of investment advice
In years gone by, the large assurance giants focused on products rather than on the needs of investors.
The industry today focuses on your investment strategy based on your needs.
This has encouraged a move away from commission-driven advice to advice which is on-going. But you must be prepared to pay for the advice, Heystek says.