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RETIREMENT ANNUITIES AND THEIR ADVANTAGES EXPLAINED

By Gerard Visser, Financial Planning Consultant at Alexander Forbes

 

There are a number of ways to save and a retirement annuity fund, is one of the potential investment tools which offer a tax efficient way to save towards retirement.

You can invest lump sums or make regular contributions into your own investment portfolios within a retirement annuity. The earliest age you can retire from the fund and make withdrawals is 55 years old.

 

At retirement you can take up to one third of your fund value in cash, subject to taxation, and the remainder can be used to either invest into a living annuity or purchase a fixed annuity, to pay yourself an income at retirement.

 

When choosing your investment portfolios for your retirement annuity, it is important to understand that a retirement annuity, as well as any other pre-retirement investment vehicles, follow Regulation 28, which limits the amount of exposure in certain asset classes. For example, you cannot have more than 75% in equities (includes local and offshore equities). This is to decrease risk for the investor and help protect and diversify portfolios.

 

What happens to your funds when you pass on?

The trustees of the retirement annuity fund will allocate your fund value to your dependents and nominated beneficiaries as is required by law. You can nominate beneficiaries for consideration with a retirement annuity and this nomination will assist the trustees of the fund in allocating the funds on your death. Typically, people whom are financially dependent on you will receive funds. Always ensure that you list all your beneficiaries for your retirement investments or contact your adviser for the necessary forms to have them listed.

 

Why save towards a retirement annuity?

Some of us might already have pension or provident funds which we use to save towards retirement and it might seem like you and/or your employer are making sufficient contributions, but in many cases this alone might not be enough to retire on, depending on your specific need.

When your contributions for your pension or provident funds are calculated, it is based on your pensionable salary and not your cost to company. The rule of thumb is that if you save 15% of your salary over 35 years, you could potentially receive 75% of your salary as a pension, as long as you received reasonable investment returns.

The problem is that your pensionable salary is usually only about 70% of your cost to company (depending on the company you work for). For example, if your monthly package is R15 000, you would need to retire on the equivalent of R11 250 (75%). However, your pensionable salary which your contributions are based on, is less at R10 500 (R15 000 x 70%). If we use the general rule of thumb it provides a pension income of only R7 875 (R10 500 x 75%), which is much lower than you might have thought.

 

You can make up the shortfall by investing additional contributions of your non-pensionable income into a retirement annuity.

 

Besides making up shortfalls, probably the biggest benefit of a retirement annuity are the tax benefits and deductions individual tax payers get for investing in a retirement annuity. With a retirement annuity you can deduct your contributions from your taxable income. Currently the limit you can deduct is 27.5% of the greater of remuneration or taxable income limited at R350 000 per year. Excess contributions are carried forward to the next tax year.

 

Other advantages of a retirement annuity are:

  • Compound interest – as you are investing over a long period, you earn growth on the growth.
  • Supporting your dependents – you can provide for those you leave behind. Your RA benefit is not subject to estate duty, and creditors cannot access your hard earned retirement funds.
  • Long-term stability -​​ you can ride out short-term fluctuations in the market in order to target long-term real growth, which pays off when you retire. ​​​​​​​​​​
  • Freedom of choice subject to regulation 28 mentioned above – you can choose your underlying investment portfolios, giving you flexibility in how your contributions are invested and how they grow.
  • Disciplined savings​​​​​​​​ – not being able to access your retirement savings before age 55 is a good thing.
  • There is no tax on interest or capital gains on your investment in the fund.

According to Alexander Forbes Member Watch, only 6% of members retire with a replacement ratio of 75% or more. What this means is that if your pensionable salary is R20 000 then a 75% replacement ratio means an income of R15 000 in retirement. Therefore, keeping up with your contributions and preserving your benefits should be at the top of your list when it comes to saving for retirement.

 

Finance

‘MOVE FAST BUT DON’T BREAK THINGS’ – WHY FINTECHS WILL COME TO LOVE REGULATION

move fast

Alex Johnson, Director of Portfolio Marketing, FICO

 

The guiding ethos of fintech is move fast and break things. It’s the fundamental advantage that disruptors have over the incumbents they’re disrupting — the ability to move quickly and make mistakes, learn from them and deliver innovative services to customers. Generally, this ethos is presented as a virtue. Banking is ‘broken’ so any investments in improving it are both notable and noble – even if there are bumps along the way.

Conversely, anything that stands in the way of this ‘march of progress’ is generally cast as a villain.

The most prominent villain for fintech companies is regulation. From their perspective, it’s a competitive moat, based on rules written for a different century, that protects banks’ ability to make money without needing to innovate and offer more or improved services to their customers.

So, it’s easy to see why a fintech company — believing fully in the virtue of its mission and faced with a litany of illogical and intractable regulations — might just say ‘we’re doing it anyway.’ That’s what Robinhood co-founder Baiju Bhatt reportedly did when his company tried to roll out a checking and savings product that it claimed was insured without confirming that with regulators first.

The problem is that while we may mythologise the ‘move fast and break things’ ethos in the abstract, consumers don’t love it when their stuff breaks in the real world.

And when fintechs and challenger banks aren’t constrained by regulation (as they mostly are in the U.S and Europe) the harm caused by this ‘move fast and break things’ approach can be much more severe than a service outage or a false claim of deposit insurance.

 

Stories from overseas

In China, online P2P lending exploded in popularity, with the number of P2P lenders growing from 50 in 2011 to 3,500 in 2015. Then the whole industry imploded when it was revealed that 40% of P2P lending platforms were Ponzi schemes.

In India, online lending companies raised a record $909 million in venture capital last year (the third-biggest market behind the U.S. and China). And those lenders are now using personal data from borrowers’ mobile phones to make lending decisions – which although illegal, is reportedly ignored by Indian regulators.

In the Philippines (another emerging market where venture capital dollars for online lending are pouring in), the National Privacy Commission is investigating hundreds of complaints from consumers about lending apps leveraging their personal data to shame them into making their payments.

 

A prediction for the decade to come

In the 2020s, I believe fintech companies will come to love – or at least quietly appreciate – regulation for two primary reasons:

 

Brand protection

Fintechs and challenger banks understand that brand recognition and affinity is key to their long-term success. Building their brands will be a challenge. A recent survey of 2,000 Brits found 40% don’t trust challenger banks at all and 67% said they are more likely to do business with banks that have branches on the high street. As Zach Bruhnke, co-founder and CEO of U.S. challenger bank HMBradley recently said, ‘We’re going to have to grow by word-of-mouth and doing the right things for our customers.’

Fintechs and challenger banks focused on the long-term task of building brand affinity and trust will, over the next decade, come to despise bad actors that skirt the rules and dress up get-rich-quick schemes in the same language they use to describe their own firms. Regulations that constrain and/or shut down these bad actors will be increasingly appreciated by legitimate market participants.

 

Disruption-friendly regulations 

In the 2010s, we saw the beginning of a trend that will strengthen in the 2020s — regulations designed to foster competition between incumbents and new market entrants. To date, such regulatory action has run the gamut, from vague (innovation sandboxes and special-use charters) to hyper-specific (U.S. regulators’ cautiously approving the use of alternative data, or the Bank of England considering giving non-banks access to its 500-billion-pound balance sheet). Perhaps, most promising, has been the work done by the Competition and Markets Authority (CMA), which has been proactively driving the adoption of rules and standards around Open Banking for past couple of years. O

ver the next decade, through careful management of public perception and increased investment in lobbying, fintechs and challenger banks will further reshape the regulatory environment from a competitive moat to a more level playing field.

 

Reaching fintech maturity

’As a licensed broker-dealer, we’re highly regulated and take clear communication very seriously. We plan to work closely with regulators as we prepare to launch our cash management program’.

This was the statement issued by the chastened co-founders of Robinhood shortly after they backed away from their plan to launch a checking and savings product without government insurance. And here’s the crazy part — that’s exactly what happened! Less than a year later the company announced a new deposit product, this time insured by the Federal Deposit Insurance Corporation (FDIC).

As fintech companies mature in the 2020s and the focus of their strategic objectives shifts from growth to profitability, regulation will play a vital role in transforming the ethos of those companies into something a bit more sustainable. Call it ‘Move fast, but don’t break things’.

 

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Finance

HOW TO MERGE YOUR FINANCES AS A COUPLE?

Finances

By Nelisiwe Ndlovu, Certified Financial Planner at Alexander Forbes

 

There is never a good time to discuss finances with your partner, married or unmarried, and one key issue that needs to be discussed is whether you should merge your finances.

Joining all your money matters can seem overwhelming at first, so you don’t have to combine every bank account and credit card from the get-go.

 

Start by having an honest discussion with regards to your individual money management and financial commitments before deciding to merge or co-manage your household finances while deciding if you want to fully merge all your finances. Detail all individual income, expenses, and all your financial commitments. The best way to achieve this would be to first take your individual budgets and combine them. This will tell you what you can and cannot afford as a couple. If one partner does not usually budget, this is a chance to start doing so as this will ensure that your household finances are under control.

 

Nelisiwe Ndlovu

Before you think about merging your finances, be open and honest about:

  • How much you earn – what is the income that you will bring home? What is the frequency of your income? Are you permanently employed or a contractor?
  • What are your current individual expenses and financial commitments? List your assets and your current debt.
  • Your individual financial goals and money management techniques – don’t worry if you might have not figured this out at the time of merging your finances – the important thing to do is to be open and honest so that you both build a stronger money foundation
  • Disclose your financial obligations, this becomes very tricky if left until too late and may cause unnecessary tension in the relationship
  • What are your goals as a couple – what is the purpose for merging your finances?

Married couples can formally or informally merge their finances as detailed above where household expenses are split between the couple (the split could be 50/50 or any fair split agreed upon by the couple, which could be based percentage-wise depending on one’s income). Some couples tackle finances by adopting the ‘pick a bill’ approach, where one couple pays the water and electricity while the other covers the food.

Being married does not mean necessarily that you need to have one joint account. You may also just want to open one joint account where you each deposit money to pay just your monthly household expenses.

 

The top five things to remember when merging finances as a couple:

 

  • Have the ability to manage your own finances before expecting another person to merge their finances with you.
  • Be mindful of your potential spouse/life partner’s money management behaviour and skills so that there are certain things you can address together before considering merging your finances
  • Always keep an open line of communication – honesty is the best policy
  • Set a money limit which you can each spend without having to consult each other
  • Don’t forget to change your wills and beneficiaries on pension or provident funds as required.

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