CT Retirement Planning 2012

7/31/2019 CT Retirement Planning 2012

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BASICS OF FINANCIAL PLANNINGJOHN MARSDENNATIONAL SALES DIRECTOR


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BASICS OF FINANCIAL PLANNING

The Most Valuable Asset is your capacity to Generate

Income

Individual age 40 earning R750 000 p.a.

8% annual increase

By age 65 total Income earned = R 50,5m

Do you have the correct cover in place?

Under insurance is main problem


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PPS Established in 1941

Sickness benefits for DentistsExpanded to recognised Professions (200 000)

1960s Life and disability Cover and RAs 2005 - OSRB2006 full range of risk productsLaunched PPSI and Short Term InsuranceAll profits returned to members Tax Free


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THANK YOU

Worldwide CoverAre you covered?


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RETIREMENT: A QUESTION OF TIMEBRUCE CAMERONEDITOR: PERSONAL FINANCE


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Agenda

Why you need to plan How much you need Long-term savings choices Pension choices The risks you face The need for advice


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Reasons to plan

Taking account of the threats: Inflation, investmentmarket returns/volatility and living too long

Products that will generate enough capital to providea sustainable income in retirement

Risk you can and cannot take when you haveinsufficient capital

Asset management choice Asset choice Taxation

Estate planning including balancing the now andthe future


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No plan: You become a statistic

Only 26% of retirement fund members will reachretirement financially secure

To achieve a financially secure retirement you needto save at least 13 cents of every rand you earn inyour life

Most fund members contribute between five and sixcents of every rand they earn

Average period of contribution: 27 years and sixmonths instead of 40 to 45 years

Most people go into retirement with a pensionequal to 28% of their last pensionable pay cheque


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Planning: A matter of options

Retirement funding is deciding what pleasure you willforgo now to have some pleasure in retirement

Too little saved = Poverty in retirement Retire early = less in retirement Live too long = Depletion of cash Too much saved = Unnecessary sacrifices before retirement


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The Build Up:Calculating how much you need

It is not a quick calculation: Capital amount of 10 x annual income is Not Enough It will be closer to 15 to 20 x annual income

You need to start at the end, not the beginning Your lifestyle in retirement Your age at retirement A sustainable income in retirement Capital required to generate a sustainable income Type of annuity (pension) this is variable


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The Build Up: Tax-IncentivisedRetirement Savings Vehicles

Occupational Retirement Funds (mainly sponsoredby employers): Defined Benefit Funds Defined Contribution Pension Funds Defined Contribution Provident Funds Umbrella Funds

Individual vehicles: Retirement Annuity Funds Preservation Funds (Pension & Provident)


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Occupational Funds

Defined benefit funds: Contributions up to 7.5 percent of pensionable income tax deductible You know what you will get (Final salary x years of membership x a

factor) No investment risk for you Must use two thirds to purchase a pension subject to income tax at

marginal rate Lump sum subject to tax on lump sum scalesDefined contribution pension funds Contributions up to 7.5 percent of pensionable income tax deductible Contributions by your employer and yourself defined No benefit guaranteed - Investment risk all yours Must use two thirds to purchase a pension subject to income tax at

marginal rate

Lump sum subject to tax on lump sum scales Defined contribution provident funds Contributions not tax deductible Contributions by your employer and yourself defined No benefit guaranteed - Investment risk all yours Receive lump sum at retirement subject to tax on lump sum scales. Own

contributions not taxable


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Dangers of Occupational Funds

Pensionable income only: Final salary excludes allallowances

Mind the Gap: No employer sponsored scheme issufficient. Most funds aim to provide 70 - 80% ofpensionable income after 40 years of employment.

Big gap for dependants/disabled: Beware DC fundswhen you are younger. You need more life assurance.Most DC funds only have assurance cover of between 2and 3 times annual pensionable income


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Individual Funds

Preservation FundsLegal structure: Amounts transferred from occupational funds No new contributions Preserves tax status of previous fund (pension or preservation) Lump sum subject to tax on lump sum scales May only be matured at age 55 or older.

Product choices Life assurance: Normally contractual with penalties for

reducing or stopping payments. Higher cost. Linked Investment Product: Greater investment choice. Non-

contractual but can be costly. Unit trust: Choice limited to the management company. Non-

contractual. Costs will depend on house


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Before and at retirement

Decisions must be made on annuity (pension).Annuity choices are: Fund-provided pension : normally a defined benefit

occupational fundOr Voluntary purchase annuity (VPA): pension bought with after-

tax money, including discretionary savings and proceeds of aprovident fund.

Or

Compulsory purchase annuity (CPA): pension bought withproceeds of a tax-incentivised occupational pension fund or retirement annuity fund


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Main CPA choices

Guaranteed life annuity: a life assurance company guaranteesyou will be paid a pre-determined pension for life (level,escalating, capital guarantee, joint and survivorship options).Pension depends on gender, age, interest rates, guaranteesand product. Dies with you.

And/or With profit annuity: a life assurer guarantees you will be paid a

minimum pension for life but increases will be dependent oninvestment returns. Dies with you.

And/or

Investment-linked living annuity (ILLA): you take the risk ofensuring that you will have a sustainable pension for the rest ofyou life. Must drawdown between 2.5 and 17.5 percent. Livesafter you.


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Main threats to a financiallysecure retirement

1. Not planning holistically (with proper advice)2. Starting to save too late3. Not saving enough4. Withdrawing savings before retirement5. Retiring too early

6. Inflation7. Costs8. Tax9. Investment choices10. Product choices

11. Living too long12. Dying too soon13. Choosing the wrong annuity14. Advice Risk


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1. Not planning holistically

Finances are a balancing act which require: Taking some risks yourself and sharing others with others. Deferring spending (saving) Taking account of affordability (debt)

Best solution: A financial needs analysis With regular check ups, particularly when circumstances

change


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2. Starting to save too late

Assuming a regular savings pattern every R100 in pension income youreceive in retirement, R65 will be from money you saved (with theinvestment returns) before the age of 45.

Percentage of income required at different ages for a 75 percent NRR:

Current Age Targeted Retirement Age

55 60 65

20 10% 7% 6%

30 16% 12% 8%

35 22% 15% 11%

40 32% 20% 14%

50 51% 48% 27%

55 103% 44%

Assumptions: Target 75% of final annual salary with a 3% real returnSource: Sam Robson, Glenrand MIB


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3. Not saving enough

Dont mistake high income with high net wealth Save below the required minimums and you will not achieve

your target Save less at the beginning and you need to save a lot more at

the end


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4. Withdrawing savings before retirement

Alexander Forbes research shows that after 40 yearsof potential fund membership: 12 percent of fund members reach retirement with an NRR of

more than 75 percent; Seven percent of fund members have an NRR of between 60

and 75 percent; 10 percent of fund members have an NRR of between 45

and 60 percent; 14 percent have an NRR of between 30 and 45 percent; and 57 percent of retirement fund members have an NRR of less

than 30 percent of their final pay cheque

One cause:Non-preservation reduces potential NRRs of 75 percent bybetween 15 and 24 percent


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Non-Preservation


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5. Retiring too early

Replacement ratios:

Retirement Age Now

Age 20 30 40 50

60 77.8% 50.4% 29.1% 12.5%

61 83.3% 54.4% 31.8% 14.3%

62 89.4% 58.7% 34.8% 16.2%

63 96.0% 63.5% 38.1% 18.3%

64 103.2% 68.6% 41.6% 20.7%

65 110.9% 74.1% 45.5% 23.2%


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6. Inflation

Inflation and being too conservative: R1 000 a month X 480 months = R 480 000 Average annual return of 8% = R3 221 070 Average annual inflation of 10% = R 340 329

SO: The buying power is R340 329

Note: Inflation of 4.5% will reduce a fixed pension by 25%

every six years Inflation of 7% will halve a fixed pension every 10

years


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Assumptions: Inflation at 4.5 %. Drawdown 6 percent%

How you need to counter inflation:


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7. Costs

Percentage points seem low : Every one percentagepoint saved in costs will improve your end benefit by 20%over 40 years

Rusconi's 2004 research on retirement savingvehicles:

- Most cost-effective is a larger occupational retirement fund.- RA with unit trust funds sold will be reduce end benefit by

between 22.3 and 32.5 percent over 40 years.- Life assurance RA will reduce benefit by between 30.8 and

44.7 percent over 40 years..


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They just nibble away


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8. Tax: Incentivised retirement products

Capital gains tax: All exemptIncome tax: (EET) for pension funds and RA funds:Exempt from income tax: Contributions (7.5

percent for occupational retirement funds. 15percent less pensionable income for RA funds)

Exempt from income tax: Investment returnsTaxed: Pension as and when received:- Lump sum: First R315 000 tax free; next R315 000

taxed at 18%; next R315 000 at 27%; andamounts over R945 001 at 36 percent.

- Pension: Taxed at marginal rate (defer tax onbalance of capital)- Income tax: TET for provident funds


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8. Tax: Non-incentivised savings products

Life assurance products:Capital gains tax: 7.5 percent in hands of insurer Income tax: 30 percent in hands of insurer No exemptions apply(Be wary of traded endowment policies)

Collective Investment Schemes:(Conduit principle)Capital gains tax: In your hands based on your marginal

rate (max 10 percent)Income tax: Your marginal rateExemptions apply on interest earnings and capital gains


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9. Investment Choices (Saving & Dis-saving)

Some facts of life: The best tax free guaranteed return you can get is

paying off your debt The best interest rate comes from RSA Retail Bonds

(available from the Post Office and PicknPay) The cheapest equity investment is in Exchange

Traded Funds (and in the long term you mayprobably do better)

Diversity of investments is the proven best solution Exceptional promises of returns come with

inordinately high risks If it sounds too good to betrue, it will be too good to be true


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Investment Choices Reg 28

Regulation 28 of the Pension Funds Act: Dictates how much you can invest in asset classes

and sub-sectors Aims at diversity of investmentBut: Does not force you into a low yielding portfolio Applies to tax-incentivised retirement savings (by

law) and investment linked living annuities (byindustry agreement under government pressure)


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That Balancing Act again

Inflation versus returns Greed versus fear Costs versus returns

Tax versus tax Risk versus returns Too conservative versus too aggressive Passive versus active


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And you cannot rely on averages

Assuming constant real after-inflationreturns is dangerous for:- People planning for retirement- For pensioners living off an investment linked

living annuity

It all depends where you are in the cycle:

Example: Fund member 10 years from retirement:1998 retiree: NRR of 8x pensionable salary2008 retiree: NRR of 14x pensionable salary(Source: Daniel Wessels)


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You cannot combat fate

Volatile markets


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10. Product Choices

- Guaranteed versus no guarantees- Capital guaranteed index linked (synthetic)

versus life guaranteed product (non-synthetic)- Contractual (life assurance RA) versus non-

contractual (Unit trust RA)- Limited underlying investment choice (single

balanced/flexible portfolio) versus wideinvestment choice (multiple funds)

- High profile brand (often higher cost) versus lowprofile brand

Warning: Only invest when you understand all There is no such thing as silly question


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11. Living too long

Many pension plans based on a 65-year-old dyingat 84 but 50% live longer

One person in a couple aged 65 has a 52% chanceof reaching age 90

A living annuity with a 3% average real annualgrowth and 5% drawdown has a 25% chance oflasting until age 90

First person to live to 150 is already 50 years old


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12. Dying too soon (pre-retirement)

Most South Africans will die before age 50 but notPPS members unless Your chances of beinginvolved in a motor accident are one in ten

80 percent of retirement fund member beneficiariesreceive less than 50 percent of what they require

Most South Africans are under-insured Insurance is there to ensure that there is sufficient

when life deals you a bad hand.

But it is a continual balancing act Too much insurance = you go without Too little insurance = you and your dependants go

without


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Dying too soon

A child is born Saving target R150 000 in 18 years You die after 10 years You have only saved R60 000

You need to cover the risk But say you die after 15 years and investmentmarkets have been good:

You only need R10 000 You are still insured for R150 000


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Dying too soon

Health warnings: Life assurance is not to make dependants rich

that will make you poor while you live Compare premiums

But cheap assurance can be expensive (watchthe premium guarantees) Be on with the new love before you are off with

the old (apologies to Will Shakespeare) Remember you have group life assurance

Be cautious of accident and big toe assurance Always confess to the dickey heart and

weekend sky diving


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13. Choosing the wrong annuity

Once you purchase a guaranteed annuity, you are lockedinto that annuity for life - life assurance guarantee iscalculated using your average expected life span and theprevailing long-term interest rates

Do not have to buy a single annuity with all your retirementcapital: split annuity derived from the same source (e.g. a

retirement fund), one annuity must have a minimumincome flow of at least R150 000 a year

maximum 4 way split on annuity from one source - capitalvalue of each annuity must exceed R25 000

Interest rates: the higher the rate the sooner to consider locking in - the lower the rate the later. Age: the older you are the better the yield taking account of

interest rates optimum time from age 70


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The older you are the better it gets

Male buys a level annuity with R1 million - implied yields are:

Age 55: R93 288 a year - 9.33% implied yield





(An implied yield is the annuity divided by R1m expressed as apercentage)


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14. Advice

Nearly everyone needs financial advice but it can be adouble-edged sword: No advice and you may not get the balance right and make

wrong investment decisions.

Bad commission-driven advice and you will not get thebalance right


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Getting the right advice

FAIS Act requires that you are provided with advice of ahigh standard but few have expertise

Financial service provider licence is no guarantee ofexpertise

Consider dealing with an organisation, such as a financialadvice company or network, rather than a one-personoperation. Organisation should have a competent team

Beware of what are called broker funds, often used tocharge extra fees

Best-qualified advisers have a certified financial planner

accreditation from the Financial Planning Institute(www.fpi.co.za ) Pay for it preferably a fee for advice not a commission

for product
http://www.fpi.co.za/http://www.fpi.co.za/


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QuestionsBefore I retire

Q & A


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Q & A


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CT Retirement Planning 2012

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