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Wealth Management

RETIREMENT OPTIONS DURING A VOLATILE MARKET

By Vaughan Harries, Certified Financial Planner at Alexander Forbes

 

You’ve worked the last 40 years of your life only to reach retirement during a time when markets have dropped more than 20% since the start of the year. Those who now need to receive an income from their retirement savings are sitting with the dilemma of what type of annuity (a financial product that gives you an income in retirement) to choose and how to navigate through these unprecedented times.

At retirement, according to the rules of a Pension Fund and Retirement Annuity Fund, you’re allowed to take up to a third in cash (subject to tax) and allocate the remaining portion of your retirement savings to provide you with an income. Currently, a Provident Fund allows you to access all of it in cash (subject to tax) at retirement. The amount that goes into the annuity is transferred, tax-free. Bear in mind that any income received from the Annuity once you’ve set it up is subject to income tax.

 

There are two main types of Annuities:

Life Annuity (also known as Guaranteed Annuity) is an insurance-type product which will pay you a pre-determined income until you pass away.

There are various types of Life Annuity options but they mainly differ by how the income increases every year. The most common types of Life Annuities are:

 

  • Vaughan Harries

    Fixed– You choose a set annual increase e.g. 0%, 3%, 5% or 10%. The greater the annual increase you choose, the lower the initial income you will receive.

  • Inflation-linked– The increases are based on the inflation rate during the year. Generally capped at a certain level.
  • With-profit– The insurer declares annual increases generally linked to the investment performance of an underlying portfolio in the product. There may be other factors that are also taken into account.

There is certainly no “one-size-fits-all” when it comes to Life Annuities as each type carries its own advantages and disadvantages.

In order to ensure your spouse and/or dependants are provided for, you can choose for the income to be paid to your spouse for their life if you pass away before them or include a “Guaranteed Period”. The guarantee period means that if you and your spouse pass away prematurely (before the end of the guarantee period) the income will pay for the rest of the guarantee period to anyone you choose (normally a dependant).

The annuity quotes from Life Assurers usually change on a weekly basis. It should be noted that buying a Life Annuity and the type of Life Annuity is final and fixed for life. You are not able to reverse or change the selection once purchased.

 

Living Annuity is an investment-type product where you choose how much income you take. You can adjust the amount you take every 12 months and needs to be between a 2.5% and 17.5% of the Living Annuity value. The most important thing to remember with a Living Annuity is not to draw too much income over time as this will mean you will run out of money before you pass away.

In the event of your death, any remaining money left in the Living Annuity will go to your dependents and beneficiaries. Try avoid falling into the trap of selecting the Living Annuity with the intention of leaving money to your family, as the primary purpose of retirement money should be to provide you with an income for life.

In a Living Annuity you take on the risk that you could live longer than expected and eventually run out of money. This is where the decision between choosing a Life or a Living Annuity becomes very important and should be discussed with your financial adviser.

You can always convert your full Living Annuity into a Life Annuity at any stage, however the converse is not possible.

Local and global markets have fallen sharply as fears of a global recession caused by COVID-19 continue to rise. Unless your retirement fund has been sitting in a Money Market Fund (i.e. 100% cash) you will have experienced a varying drop in value of your retirement savings depending on your exposure to the equity markets.

The one thing that previous major market crashes like the Global Financial Crisis in 2008, Dot-com Bubble in 2000 and Black Monday in 1987 had in common is that they all had major recoveries in the subsequent three years following the crisis.

The advice you will be receiving, during extreme market volatility, is to remain invested and to avoid making any “knee jerk” changes as this can have a long-lasting impact on your investment value. Ignoring this advice and making irrational decisions in times of panic can ultimately lead you to locking-in recent losses at the bottom of the market when a recovery is likely to occur in the future.

Purchasing a Life Annuity during a time when markets have dropped significantly, could permanently lock-in a lower starting income due to the fact that your retirement savings’ Rand value is now less. Though, due to current conditions in the South African market, government bond yields have gone up (these have a big effect on income from Life Annuities), which means Life Assurers are offering higher starting incomes on their Life Annuities than in the recent past. This would then assist in giving you an income comparable to before the market drop.

Taking this into account, Life Annuities could be seen as an attractive option in volatile markets as you do not need to worry about market performance and how long the bear market lasts. This peace of mind could pique the interest of retirees who are currently withdrawing at unsustainable levels from their Living Annuity, as you could be receiving a similar but sustainable income from a Life Annuity.

As a Living Annuity investor, you could adopt an investment strategy where you ring-fence portions of your Living Annuity into “buckets” with each bucket assigned an objective, a time frame and appropriate asset allocation. This structure can be used as a tool to help investors stick to the principles of not “selling” growth assets when markets have fallen to fund an income.

That said, the best defence for a Living Annuity during a bear market is to try reduce your withdrawal income or at least keep it the same on your next anniversary date.

With the above in mind, it is important to consult your financial adviser during these uncertain times to manage your retirement savings in a manner that will give you the best opportunity to have a sustainable income into the future based on your unique circumstances.

 

Wealth Management

HOW RESILIENT IS YOUR ORGANISATION’S SECURITY?

Kimon Nicolaides, Digital Services Group Head at MASS

 

Organisational security can be thought of like peeling the layers of an onion – with critical assets sitting in the middle protected by multiple layers, and if one layer is removed or breached, there’s another one underneath. At least that’s the way it should be – too often, however, we see a siloed approach to the different areas of security. In practice, physical, cyber and personnel security can be much more inter-related than many imagine.

The finance sector is arguably one of the more mature in terms of established security measures. However, it’s also vastly diverse, targeted by some of the most advanced threat actors, and one where even the smallest breach has the potential for significant impact, monetarily, or on market reputation, perception or confidence. Security measures should therefore be viewed holistically, led and understood by senior management, otherwise gaps for exploitation will be found by intelligent and experienced people, supported by an ever-growing arsenal of exploitation technology.

Here, we take a closer look at some of the things that comprise a holistic view of security – based on the approach we take with public sector and defence organisations.

 

Physical security

It may seem obvious, but the first layer to assess should be the physical access to your business. For all organisations, this step remains as true today as it ever has been – even for the finance industry where physical security principles have been established over many years.

This stage should go back to the basics of how an intruder could gain access, starting by reviewing the ‘perimeter’ controls. In fact, the first question is, ‘what is the perimeter?’. With the potential for distributed site facilities, linked remote assets, and supply chain dependencies, this simple question needs careful consideration.

Scenario-based analysis, using threat actor personas, motivations and objectives can really help by defining a where a ‘perimeter’ really lies. It’s also an invaluable methodology for exposing how an organisation could be exploited.

This stage should involve a review of physical controls such as fencing, access technology, CCTV coverage etc., including, their role in deterrence and detection of hostile reconnaissance activities.  Disrupting the planning cycle of attacks is often overlooked relative to direct prevention of unauthorised access.

Ultimately, security measures are only as effective as the people that apply them, so an understanding of human behaviours is essential. It’s important to consider how people’s actions affect overall site security and, why these actions occur.

Issues can range from the wearing of security badges in the street through to poor motivation and effectiveness of roving security staff or those monitoring CCTV. Simple and innocent human mistakes could form the seed of future security breaches.

 

Cyber security

The finance sector has progressed its cyber resilience considerably as it’s been dealing with threats for many years. But business sizes now range from the very large to the small and, as new forms of financial transactions evolve, protection becomes more challenging. There is an increased availability of cyber exploitation toolsets and associated managed services and coupled with a reduction in their cost – lowering the financial and technical barriers to advanced cyber-attacks.

This means that cyber security, even for the finance sector, needs to be taken to a new level and existing assumptions continuously challenged.

For example, while penetration testing regimes remain a vital tool in mitigating network cyber risk (including ‘CBEST’ which has been widely rolled out across the finance sector), these still remain a snapshot in time. While they deliver valuable depth of analysis within a network, they are often constrained in breadth of scope and can potentially leave vulnerability blind spots. Very frequent, lighter-touch cyber assessments can fill this gap as they offer a more dynamic view of ongoing vulnerabilities over a wider proportion of the estate, which could represent ‘low hanging fruit’ for the cyber actor. Assessments can be enhanced by applying modern threat intelligence techniques to rapidly identify existing compromises and potential weaknesses (including personnel and corporate digital footprint). This establishes a picture of cyber posture and vulnerabilities before any testing taking place.

Similarly, end-user device security is often viewed in terms of the encryption strength, keys etc.  However, modern methods of fault injection attack (a device’s response to artificially applied ‘fault conditions’ used to derive security credentials), can effectively sidestep assumed security measures, which would normally take decades to ‘crack’ using computer power. So, it makes sense to test a device’s vulnerability to fault injection, rather than assuming encryption alone will protect it.

For this reason, it’s crucial to examine the wider supply chain. In the finance sector, there is high dependence on suppliers of digital telecommunications and energy services, and when different systems are interconnected its challenging to pinpoint cyber resilience risks. Despite this, it’s possible to map complex information to establish risk, by identifying ‘hot-spot’ concentrations of dependencies that represent single-point failures within the complexity of the overall business operation.

 

The insider threat

The potential threat from insiders – those who might misuse their legitimate access to an organisation’s assets for unauthorised purposes – is often overlooked.

This is particularly true for financial businesses, where personal financial gain could be an incentive, or where security controls are so effective that hostile actors must exploit those with legitimate access to circumvent them. You can think of insider threat as the ‘grand master skeleton key’ of security, as there are few security measures that cannot be overcome by the right insider, or team of insiders.  Security compromises involving insiders can also have a disproportionately high business impact.

Yet many organisations consider insider risk to be mitigated simply by pre-employment screening and fail to recognise the spectrum of risks ranging from genuine human error, through to orchestrated insider activity by paid professionals. Insider cases frequently involve individuals who have been with an organisation for some years and have had some personal vulnerability exploited or exposed, or simply become disgruntled.

It’s a broad area to address. Internal governance, security culture, employee wellbeing, employment measures, corporate digital footprint, and perceived employee sentiment are some of the aspects that should be considered. When you have understood this for your own organisation, you should make the same assessment of your supply chain.

If the business is committed, it’s possible to use structured analytical methods to quantify your organisation’s maturity and assess where the key vulnerabilities and risks could lie. This understanding paves the way for improvement, and even small changes can make a big difference.

 

The hidden layers

Like an onion, there are hidden layers to security that may be overlooked so it’s important to consider physical, cyber and personnel security collectively, and to understand the dependencies you have as a business.

For example, your own environment may be protected, but if data is shared with your suppliers or partners, is it still secure? Similarly, if a supplier or partner has a security breach, what does it mean for your operation, your business continuity and your customers?

When assessing security measures, it’s essential to go an extra layer deeper and consider how a range of factors could impact your organisation and its readiness to respond to an incident.

At MASS, our security experts consist of professionals with extensive experience in preventing security breaches and performing assessments in accordance with Ministry of Defence processes, so that we can ensure our security analysis meets and exceeds industry best practice.

For more information, please visit: https://www.mass.co.uk/what-we-do/cyber-security/cyber-security-training/

 

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Wealth Management

HOW TO CATCH UP ON YOUR RETIREMENT SAVINGS

By Gerard Visser, Certified Financial Planner at Alexander Forbes

For many South Africans who were already finding it difficult to save for retirement, Covid-19 has created additional financial pressures which may take years to overcome.

If you stopped contributions to your retirement annuity, or took a payment holiday on your pension or provident fund, you might be worried about the shortfall created, and how you’re going to catch up.

Stop worrying and take action to avoid retiring with insufficient funds. There are many ways to contribute to your retirement, from employer and employee contributions to pension or provident fund, monthly contributions to a Retirement Annuity or a tax free savings account.

With many people having a reduced income due to the economic ramifications of Covid-19, it might be impossible to contribute a large monthly amount to catch up while having concerns such as debt to pay, but I recommend starting with your budget. This will aid you not only by freeing up extra funds to catch up your retirement contributions with, but could also create some peace of mind with an opportunity to pay debts off faster or save some discretionary money.

Gerard Visser

There are many reasons why it is important to follow a monthly budget. Besides reducing stress levels by keeping an eye on your spending habits, it also allows you to track your debts, finding opportunities to top up emergency funds or save extra towards your retirement. A budget goes hand-in-hand with setting and achieving financial goals.

A budget does create an additional administrative burden and requires time to update. I have my budget on an Excel spreadsheet and update it monthly when making EFT payments.

Costs for entertainment, groceries and petrol are variable in nature and change each month. You might end up not using all the funds set aside for these variable costs. Adding these leftover funds at the end of the month to your savings is a good habit to inculcate. The immediate impact might seem small but over time will make a positive outcome to both your retirement and the development of a savings mind-set.

When you are able to free up some money each month, start automating your savings. Instead of having a variable amount go towards savings, set up an automatic contribution, where you “pay yourself first”. Set up an automatic debit for your retirement savings and you’ll grow these funds without having to think about it.

One of the most important decisions you can take to help make your retirement comfortable is preserving your retirement funds when changing employer.

When starting new employment or if you are coming out of a payment holiday, try matching your employer’s monthly contribution toward your pension or provident fund, or if on a total cost to company structure, start on the maximum employee contribution percentage. By doing this as well as automating your savings, you get use to contributing those amounts and could potentially have a larger nest egg at retirement.

Remember that life happens, and your budget might come under strain – many of us have experienced this during the pandemic. If you have been going through a difficult financial time, it is time to reassess and ask yourself, what in your budget is necessary and what is actually a luxury?

It is never too late to start sorting out your finances, but the earlier you start, the better, and more achievable, the outcome will be.

 

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