Sumitra

Good evening to you welcome to My Money and Me. Coming up on the show tonight we are talking about your pension what to do with it. If you suddenly lose your job or decided to move jobs or if you’ve reached pension age should you be looking at investing some of that money.

 

I have 2 experts in studio to answer all your questions, anything that you may want to know about what to do with that pension.

 

Let’s get into it, we received an email from  one of our listeners Dan  and he asked about investing his pension fund, he said that he needed some advice on what to do, he just got terminated from his job and he needed to know what next, what should he be doing. He is on the line to explain to us what happened and what exactly he’s looking for and I also have 2 guest in studio Michael Haldane founder of Global & Local Investment Advisors and his colleague Mauro Forlin Director of Global & Local to talk us through all of these questions, to answer some of these questions. Let’s start with Dan, Dan a very good evening to you.

 

Dan

Hi, how are you

 

 

Sumitra

I’m good thank you. So Dan we heard you, you said you needed some advice. We’ve got 2 experts in studio to help you. Take us first through what happened, because you said that your job just got terminated very suddenly.

 

Dan

I was employed permanently and recently I got promoted but to a contract position. As senior managers you get a 5-year contract. Now I still have to decide on this lump sum I have from GEPF because I am now going to work on a different pension number.

 

Sumitra

So my guest in studio are going to answer your questions, as I understand you’ve now from a permanent position to a contract position and you are allowed to move with that pension, but you are wondering what to do with the pension? So Dan stay on the line.

 

 

Dan

Yes but my key question is, I want something where I can invest that money and maybe I receive monthly dividends.

 

Sumitra

How old are you?

 

 

Dan

57 years.

 

Sumitra

Okay let’s go for it Michael

 

Michael

Good evening Dan, because of your age you have a number of options , you can move it into a individual private pension fund at any company like Allan Gray, Liberty, wherever they all have options but if action that you haven’t any access on it and there isn’t any income tax. Because of your age , anyone over age 55 of that pension fund you can access a lump sum of 1/3rd up to half a million rand without any income tax the balance you can enter into a fixed annuity where a fixed income for your life or a living annuity, which allows an income every month which annually you are able to adjust. A fixed annuity is either for your life or it is for a fixed number of years, if you die after that period capital is lost. A living annuity lives on after your life has ended, you can hand it on to your wife, kids, whoever. I hope that helps

 

Sumitra

Do you want to come in here Mauro?

 

Dan

I have a is Retirement Annuity on the side, the RA is going to continue but now with this lump sum I wanted to invest it for 5 years without touching.

 

Mauro

Dan good evening it’s Mauro, so what you could do is you could transfer it tax free to a Preservation Fund. A Preservation fund is offered by any of the large insurers such as Momentum, Liberty, Old Mutual, Sanlam the more well-known companies Allan Gray, Investec, etc. What they do is they preserve the money for you, now the problem is that this option will not pay you an income, to generate an income from the capital in your GEPF you have to change the format it is. At the moment it is in a Pension fund if you move that it will be a Pension Preservation fund and there is  no income in that, if you  then need an income from it, we would then need to invest it into a fixed annuity or a living  annuity which then pays you an income for life. The difference between the two as Michael mentioned is a fixed annuity pays you a fixed income, which sometimes increases over the years for a period or your life and a living annuity lives on after you, so your beneficiary gets the benefit of it. There is one other option that none of us really like and that is you could withdraw it from the GEPF but then you  would be subject to tax, any percentage from 18% to 36% and then you could do what you like with the funds  but understand if that is the case it put a  big dent into your retirement planning requirements.

 

Sumitra

I think that option is never advisable because you have to have enough money for retirement. Dan did you seek any financial advice, do you actually put the required amount of money into the Pension fund or Retirement Annuity to ensure that you have enough to live off once you do retire or reach retirement age.

 

Dan

At the moment I don’t have any bonds or loans as such. I just have this amount they have already sent me calculations and I can see if I invest this lump sum at least for 5 years because I am still working on contract after that period I would still have money.

 

Michael

Look there is an option where you enter the funds into a living annuity pick the income you want for a period of a year or so. After year 5 you then adjust the income down or up depending on what you need but it all relates to what return you have earned on that Pension fund, if you aren’t earning enough the income you access might erode the actual capital, so that in 5 years your annuity might fall, it all really relates to the income you have to have. At the moment you are quite young you might live to age 90, I don’t know but that Pension fund should last for your whole life. I would really recommend seek expert advice, look at all the numbers and cost and have a look at what is best for you now but also options that in time, if your life is different you can adjust those options.

 

Sumitra

Mauro what about as an option posed to taking out all the funds, could Dan not maybe look at diversifying, maybe withdrawing a portion of the funds and investment it somewhere else, to grow because I think what Dan really wants is grow some of his funds as opposed to it just sitting there until retirement age.

 

Mauro

If you transfer the funds to a Preservation fund you will be growing the capital, the only difference here is you not going to be receiving an income from this type of investment. Effectively the Preservation fund is quite a nice vehicle because you can take one full or partial withdrawal prior to retirement it is taxable, invest that for 5 years or generate a capital and the balance will have to stay in that Preservation fund until you formerly retire. The other way you could do it is if you formerly retire out of the GEPF and you could take 1/3rd cash portion up to R 500 000 is tax free depending on if there were any prior withdrawals. The 1/3rd portion depending on the amount is taxable and the 2/3rd portion you will need to purchase an annuity as Michael mentioned and choose and income between a minimum of 2.50% and a maximum of 17.50% per annum. There are a number of options and I agree with Michael, I think Dan you need to sit down with someone with will model this in detail, so that you are able to make the absolute best decision for you.

 

Michael

If I could add if you have worked for the government before 1998 any funds you have entered into a Pension fund you can withdraw it without having any tax on those funds when you officially go on pension, which is a vital element which often gets overlooked. So of your Pension fund you able to withdraw 1/3rd portion up to R 500 000 tax free and any funds entered into a GEPF up till end of 1998 you can also access tax free.

 

Dan

That is the case with me. To give an example I have consulted with institutions like with Allan Gray and state things in business language and I am a simple man with a substantial amount of capital from my calculations. What I’ve noticed is everyone is trying to put their hands on these funds, what I need is simple language.

 

Michael

You need to do and go with what works for you. By law everything needs to be put in writing, and you need to understand everything a 100% before making a decision. If you do not understand you need to ask those questions until you are a 100% satisfied, you have spent your whole life building this Pension fund and it needs to be taken care in the correct manner as to what is best for you and not in the favour of the broker or the company.

 

Dan

Yes and that’s my problem when I request information to be sent to me and I go through the documents I notice the commission and I think to myself this person is interested in the commission on the investment and not on my interests.

 

 

 

Michael

I would recommend contact a big company like Allan Gray and ask for a number of agents that are based in your area and which are independent broker. An independent broker can offer advice on different product providers, they aren’t linked to a particular provider and ask them about every option available and then once you have received those options look at the ins and out and ask them to explain it in simple terms that everyone will understand. I am in this industry for over 23 years, in 1996 it was books but now it is a lot easier. About 18 months ago the law was amended in the financial industry, the client has to have fair knowledge and understanding, insist on it.

 

 

Sumitra

I think this is the responsibility of any financial advisor and financial institution, that they have to explain to you what’s happening and what it will mean for you as a client. I think you raise a very important point, if you not understanding the language that they are speaking don’t rush, find out as much as you can and meet with as many advisors  because as you’ve said you and as Michael mentioned you have spent your life saving towards this pension fund and you don’t want to any irrational decisions that is not in your best interest. So take the time and I hope that we have managed to give you a few options here tonight. Take the time and speak to as many advisors as you need too and you will find someone that will speak in layman terms, because so often you find the financial jargon goes over our heads and we often feel embarrassed to ask what is this and ask for it to be explained in simple terms, you need to look at your profile and understand exactly what it is that you want to do with your money, you need understand your risk profile as well because from what I understand you really want to grow that income but you would also like to safe guard your future with the pension fund so you do not want to make a hasty decision, get as much information as you can, read up as much as possible and meet as many financial advisors as possible and only when you are comfortable then make a decision and make sure that they do the calculations for you, so you have an idea of how much you would have after X amount of years. Okay Mauro would like to add something quickly.

 

Mauro

Dan something that you said earlier about commission. Don’t be sacred of commission, don’t be afraid of paying someone to do the work for you, the only thing is understanding how they get to that commission amount or percentage and whether it’s a number you willing to pay. If someone says give me your business, pay me for doing the work and then disappear and never service you again then that’s not the right model. The other thing is you don’t have to pay a commission ask the advisor to charge you an hourly rate and to quote you their hourly rate. Giving advice and being involved in this industry is a passion, one that Michael and myself do everyday 24 hours a day and there’s a lot of advisors out there some which are better than others, you just need to find the right person and remember look at the numbers the commission amount, work it out as a percentage on the capital and on investments there are two types of fees an advisor can earn an upfront fee and an ongoing fee. If you choose an ongoing fee and the advisor does not provide that advice and service find someone else.

 

Sumitra

Unfortunately we going to have to leave it there, Dan I hope we have given you some good advice. Make the right decisions and if you still require help get in touch with us. I hope this was helpful and remember Mauro raised a very good point, ask as many questions as you like because it is very important and well within your rights. Thank you so much for listening in and I hope we have helped Dan. To my guests Michael and Mauro thank you very much for helping Dan, I feel that it was very useful and some good options for anyone experiencing the same situation. Michael Haldane founder of Global & Local Investment Advisors and Mauro Forlin Director of Global & Local, thank you for your time.