Plan well for a secure retirement

2012-01-21 08:28

Absa Investment Management Services (AIMS) has reduced its monthly debit order contributions to retirement annuities (RA) on its linked investment platforms in a bid to get people saving for retirement.

The minimum monthly investment is now R250, a 50% reduction on the R500 that appears to be the norm. This makes investment-linked retirement annuities more accessible for the average saver.

Moreover, clients can choose to have their debits taken off on the 10th and 17th of the month. This gives them greater flexibility, as the risk of default is always a worry, says AIMS general manager Mark Kitching.

An investment linked RA, such as the AIMS RA, is a low-cost, transparent product and is usually linked to an underlying investment like a unit trust.

As it is not underwritten by an insurance policy there is no penalty if you stop contributing, which makes types of annuities more popular. Those that are underwritten by an insurance policy are typically sold through life companies.

They are less flexible as they are insurance policies and penalties can apply if you stop your contributions. But they can offer life and risk cover as add-on benefits and they tend to have lower premium requirements.

While an investment-linked RA may look more attractive due to its flexibility, these can sometimes carry hefty costs by the time the financial adviser, platform provider and unit trust provider have taken their fees, so research is critical.

Questions to ask your broker:
1. What are the costs involved? Get a breakdown of fees and find out exactly what the investment will cost you. You should turn down an RA with an upfront fee, which is unfair to clients, Ingram says.

2. What are the real returns likely to be? If returns are 5% a year and you are paying 2% a year in fees, real returns are only 3%. Take this into account, mindful that the average RA fund levies 3% in total fees every year, says Steven Nathan, CEO of 10X investments. You should ideally invest in a retirement fund charging no more than 1% in total yearly fees.

3. Will my RA beat inflation? According to Ingram, unit trusts or a Satrix investment would have to grow by about 3.5% every year to offer better returns than an RA due to the tax benefits, which is a high performance benchmark.

4. Which fund choices are available – will I have access to a wide variety of funds, or are there restrictions?

5. Be involved – don’t take out an RA and sit back. Get regular updates. Are you saving enough and getting maximum value?

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