Personal-Finance

Your finance questions answered

2016-12-03 10:56

KGAMI WRITES:

I recently lost my job and now that I am 50 years old, my chance of getting another job is very slim. I would like to know what happens to my retirement annuity (RA). Will I lose all the money I paid in? Will my money still grow and will I be penalised for not contributing?

CRAIG SHER, HEAD OF RESEARCH AND DEVELOPMENT FOR DISCOVERY INVEST, REPLIES:

What happens to your RA, do you lose all the money paid?

The RA is your accumulated savings, so the amount will just stay invested until you are able to start withdrawing the proceeds.

This can happen legally from age 55 or later (or on earlier disability) when the money is transferred to an annuity to provide an income for you in retirement.

The RA value will grow in line with the type of investments you choose.

Do your benefits get penalised or are you still going to have your benefits?

The benefits remain yours. There are structures across the industry where there may be a fee that is levied against your built-up RA fund for stopping your regular contributions if you had originally contracted to keep them going until your retirement date.

Usually the reason for this is because the company may have paid commission to your financial adviser based on the length of time you planned to contribute and stay invested.

Based on your planned investment term, the company can afford to pay this to your adviser because of the fees it expects to earn.

If you now change this and contribute for a shorter period or contribute less, then there could be a fee against your fund in order for the company to recover its initial outlay.

Must you notify the company that you are out of job and battling to find another job?

If you are unable to make your monthly payments, you must ask for the debit order to be stopped so that you don’t have bounced debit orders.

Some RA policies include retrenchment protection, which will pay your premiums for a few months.

In that case, it is important to inform them if you have been formally retrenched.

If you get a new job, do you continue with the existing RA or do you have to start a new RA?

Depending on the structure of RA that you chose, there may be different rules on stopping and starting your contributions up again. Generally, you can continue in the same RA.

MIKE WRITES:

Is there a way to invest in cost-effective exchange-traded funds offshore using my foreign investment allowance?

CITY PRESS REPLIES:

If you want to trade shares on other exchanges or even just buy offshore-listed exchange-traded funds, you would need to open a stockbroking account with a South African company.

Because of money laundering legislation, including the recent implementation of the Common Reporting Standard, offshore companies aren’t interested in dealing directly with South Africans.

Fortunately, there are several local stockbrokers who offer cost-effective offshore investment platforms.

You invest with foreign currency using your foreign investment allowance and have access across many different security exchanges.

STANDARD BANK WEBTRADER:

Minimum investment $1 000, although those wanting to experience trading without any financial obligation are able to do so via a 20-day demonstration account seeded with a simulated $100 000.

ABSA ONLINE SHARE TRADING:

Minimum investment: $1 000.

SANLAM ITRADE:

Minimum investment: R100 000.

These platforms provide investments in the three major currencies (US dollar, British pound and euro). T

he fees range from 0.2% to 0.5% per annum. Brokerage for equity trades executed would differ across the exchanges, but if you are trading in the US and UK, there is a minimum fee of $20 and £12 respectively.

There will also be fees to convert your currency.

If you are just looking to invest in an offshore exchange-traded fund, the most popular and cost-effective is iShares, which has over $1 trillion invested and accounts for 37.8% of the world’s total exchange-traded fund assets under management.

iShares provides a global range of market-index-tracking funds.

SCHALK WRITES:

Would it make sense to have one’s salary paid directly into one’s home loan account and, after the monthly instalment goes off, to transfer the required cash to other accounts?

TOMMY NEL, HEAD OF CREDIT AT FNB HOME LOANS, REPLIES:

Customers are not able to have their salaries paid directly into a home loan account.

There is, however, nothing that stops them from transferring their full salary into their home loan’s flexi facility and then transferring it back to their transactional accounts as and when they need the money to save on their interest bill.

If your salary is paid on the same date every month, another useful trick to optimise your total interest bill is to schedule all the monthly debit orders for your credit agreements to run on your salary date.

The national payments system processes all credits into accounts – like salaries – before any debits and debit orders scheduled for a particular day.

This could help optimise borrowing costs for consumers and also help keep their credit records in the best possible shape.

FNB also offers the One Account facility, which is an overdraft account secured by the property.

While this is popular with some customers, our research shows that others prefer to not have one “big negative balance”.

Customers need to find a solution that works for them.

LAWRENCE WRITES:

I have a life cover policy at Sanlam and I would like to convert it to an investment or retirement fund to boost my retirement. Does it have any investment value?

SANLAM’S PRODUCT ACTUARY, PETRIE MARX, REPLIES:

Previous-generation “universal life” products had an investment element integrated with life cover.

But the sale of those products stopped, basically, around the turn of the century.

Although universal policies had some advantages of their own, notably the possibility of a surrender value and upside investment potential, they suffered from the disadvantages, such as a lack of transparency, volatile investment markets affecting cover, and the cost of pure risk cover being more expensive than it otherwise could have been.

As a result, new-generation products were designed around a general customer and adviser preference of “buy the most cost-effective cover and invest the rest”.

The result was both risk and savings products that were more transparent, more easily understood by customers and that addressed specific financial needs.

Now, in response to the specific question, both life cover and retirement needs are the pillars of any financial plan, but I would encourage customers not to look at it completely separately.

It should not be an “either-or” as far as priorities are concerned. Instead, no retirement plan can be considered complete without sufficient life, disability and income protection cover also being put in place.

Although there are retirement annuities that include an element of life cover, these products are certainly no longer the norm.

It may have been seen as a tax advantage to effectively also be able to deduct risk cover contributions for personal income tax purposes, but then payment of the cover also had to be used to purchase an income.

Customers would generally be better served by using their maximum allowance to actually save towards retirement.

In addition, risk cover contributions can be paid from “after-tax” money, but with the proceeds being free of income tax in the hands of the claimant.

Also note that there are some “retirement boosters” or cash-back benefits available under some modern risk cover products, but these come in the form of specific benefits that must be selected upfront, and for which you pay a specific premium to contribute towards such a privilege.

It is not as simple as simply electing to convert some of your day-to-day cover to a retirement benefit at any point in time.

There will be a cost impact from day one, when cover is structured in that way.

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November 19 2017