RETRENCHED OR UNPAID: WHAT HAPPENS TO YOUR RETIREMENT SAVINGS?

[00:00] Welcome to the official podcast from mycreditstatus.co.za We will be introducing you to credit experts who will be providing valuable insight and advice from your financial health to improving your credit status and score. Your host for the show is Laura Palmieri.

Laura: [00:20] Hi, and welcome to My Credit Status podcast. Chatting to me today is Ryan McCaughey a financial advisor at Hewett Wealth. Ryan has built up extensive experience in the investment industry over the last nine years, working as an equity analyst, private client's portfolio manager, and more recently as a financial advisor. Welcome, Ryan.

Ryan: [00:43] Thanks Laura. Thanks for having me.

Laura: [00:45] Okay. Now, this current COVID-19 pandemic has cast a lot of panic and uncertainty, leaving many people with questions about their financial future and the result and impact of this pandemic going forward. So that brings us to why we have you on the show today, so the obvious topic of conversation at the moment is COVID-19. How much of a threat is it to South African investors and to retirement savings in the long term?

Ryan: [01:13] Laura, that's a good question. COVID-19 has obviously had a big impact on not just the financial markets, but on the economy as a whole but when you're specifically asking here about retirement savings and South African investors, so just honing in on the investment side of things. Equities from the highs that we had in March and then the pullback in COVID, the all-share index was down about 32% over that period. But remember that this kind of drop is an event-driven crisis and not a fundamental crisis as the last financial crisis was, but obviously given how long this has gone on for it does impact how different companies are earning their income and then obviously how that impacts your investments.

[01:58] But then also you've got to remember that a lot of the retirement savings plans, investors were regulated by Reg 28 so you could only have a max exposure of 75% to equities and that's including property as a whole. So given that pull back a lot of those investors retirement savings capital would've had a combination of equity, property, bonds, and cash, so they wouldn't have been as severely impacted as a pure equity investor. And given the way markets have recovered since those clients are back to or more majority of clients are back to that same.

Laura: [02:40] They've gone back to almost where they were, okay.

Ryan: [02:44] Yes, and the one that the savers really have to keep in mind is that given the rate cuts that we've had in South Africa and globally, that obviously has a big impact on people that are looking to retire now and those that are already retired that rely on the interest rates. Where going into COVID you could get 7.5/8% from money market, now you're getting all the way down at 5% because of those rate cuts.

Laura: [03:11] Yes, that's actually true. So on the one side, it's great if you're looking to purchasing a new home. On the downside is as you've mentioned with the interest that's going to be earned at the moment.

Ryan: [03:23] Exactly.

Laura: [03:24] So actually it brings back to the next question, so what advice would you give someone retiring right now?

Ryan: [03:31] So my advice for someone retiring now or looking to retire the next two to five years would be to ensure that they have a long term financial plan in place and particular that it's actively managed and it's reviewed at least annually. And what I mean by long term financial plan, it's got to incorporate your risk, your retirement planning, risk, cover, death, and succession planning, and then obviously tying that all together you have to align it with your needs and objectives, so your risk appetite and then at the same time review what you're currently paying for fees, the tax implications of your current structure because obviously, you're going to start drawing from that structure and then obviously your investment performance.

[04:14] So if your investments are mandated to return a specific objective and if they aren't then that's something you need to have a look at for the future, but the crux of the matter is that it's critical to ensure that your asset allocation takes account of your risk tolerance, as well as your short term, medium and long term needs and objectives and that you stick to that strategy. Obviously you can tweak it here and there as you're progressing into your retirement life, but these cycles they happen and they do take time to get back to what ...

Laura: [04:51] Back to normal, and basically also like you mentioned as well to have it reviewed at least once a year.

Ryan: [04:56] Yes, so the reviewings the most important part because as you know in life there's always additional expenses that you have, your objectives change, your needs change to so having someone that can have a look and review your structure on an annual basis or sometimes even quarterly, you can just ensure that you are on track to retire comfortably and for the long term.

Laura: [05:24] Okay. Now how do you protect investments as a wealth manager and savings from the anomalies like the effects of the Coronavirus and other short term effects that affect the market?

Ryan: [05:38] So, yes so this is a real important one and then it's something that comes through in times like these. Firstly, like I mentioned earlier, you've got to structure your client's portfolio or if you're doing it personally structure your portfolio base and what your needs and objectives are. So you really need to identify those and then align that with the well-diversified risk-adjusted investment allocation. So what I'm meaning is when you retire, like they'd say it's age sixty-five and you've got to project your income up until age a hundred as for say, just so that you cater for all those needs and then you bring it back to today. And then you base what capital you have and what your objectives are and then you allocate that money or an investment advisor would allocate that money to a well-diversified portfolio. So you'd have a portion that's generating interest in the beginning and then your longer term assets that are generating your capital growth.

Laura: [06:38] So it's basically a basket that you're putting together of different investment structures in order to safeguard you with events like what happened now. So you're not sitting with all your eggs in one basket like this, you've actually diversified it, so you can carry this kind of semi crash because it will rectify itself and your portfolio is covered with other entities from that.

Ryan: [07:00] Exactly, so you really want to have a look at something that's well-diversified. So let's say you're retiring and then all of a sudden equity markets look attractive and you put everything in equity markets. It's not a good idea because that's your nest egg for retirement. You've got to find something that's generating the interest side and the capital side and then that's going to give you your retirement income for the foreseeable future or based on what your needs and objectives are.

Laura: [07:27] Okay, yes that makes a lot of sense there actually. Alright now, is it worth investing in a retirement product during this time of COVID-19 and before you answer that question, can you briefly explain what different types of retirement products there are?

Ryan: [07:44] Okay, I'll start with the second part of your question?

Laura: [07:49] Yes, that's easier.

Ryan: [07:49] So retirement products, they're broad. If you break it down you've got one side of it is where it's individual retirement products and then the other side of it where there's an employer relationship. So, on the employer relationship side, you've got your pension fund and Provident fund so that would be the majority of people that are employed will have some kind of a fund set up with their respective employers. And then normally on top of that there's tied and risk covers and the likes and then on the individual side, you'd have your retirement annuities, and then obviously this is all pre-tax money. So what you do there is you invest, you get the tax break down when you submit your tax and then once you retire from these funds, that's where you're allowed to take one third in cash and the other two-thirds have to be invested into an annuity.

[08:41] And then getting back to your first part of the question about whether it's worthwhile investing in retirement products during COVID-19. This one obviously with an employment contract you're bound to the pension or the Provident fund as a percentage of your salary, but if you having a look at the retirement annuity side there it's depending if it's what retirement product that is in. If it's a short term type of retirement product or if it's the new generation ones, but a retirement annuity you've got to remember that that's not your be-all and end all of saving for retirement. You kind of want to have a combination between discretionary and compulsion investments where your retirement products fit into the compulsory.

[09:28] But investing in retirement annuity product, number one, it gives you the tax break because you can reduce your tax payable by what you're contributing to those certain levels, and then the second part of it is that whatever you invest in there you get the tax break obviously, but then there's no interest tax. There's no dividends tax, there's no capital gains tax, so that compounding that plays in your favour until retirement and then only once you're retired you start paying tax on the income that you earn from there.

Laura: [10:04] Okay, so basically kind of almost answered it, but what is your personal opinion regarding retirement annuity at the stage?

Ryan: [10:13] Yes, if you've got one in place and if your budget allows for it, I would still stick to the rule of thumb of doing ten to 15% of your monthly income and stick to your retirement annuity because that's part of your plan, you're saving for retirement but at the same time during COVID-19 people's incomes have been reduced so you've got to have a look at it from both sides. Look at it from what you can afford and then also your long-term retirement plans.

Laura: [10:48] Can a consumer if they are already in an existing retirement plan and they have X amount that they're contributing every month, can they decrease that amount for a certain period?

Ryan: [10:59] They can, so this is where I mentioned earlier, where if you're having a look at an insurance type of retirement annuity and those kinds of retirement annuities often there's a whole lot of different fees built into that. So if you do reduce your payment or you cancel your monthly contribution there could be penalties tied to that. Whereas if you take out a new generation retirement annuity where you don't have all those fees built into it, then you can adjust your retirement annuity contributions as and when. You can either do a lump sum at the end of the year, you can do monthly contributions, it just depends on what the provider’s minimums and maximums are. So a lot of them will have a set minimum monthly debit order amount and a set minimum lump sum amount.

Laura: [11:54] Okay, so the other question is have there been any changes to the living annuity drawdown rates during COVID-19?

Ryan: [12:03] Yes, so that one they've passed it lately in the last couple of weeks but with the living annuity before the changes, you were only allowed to withdraw between two and a half to 17.5% of your living annuity. So just to be clear, a living annuity is once you retire from a retirement annuity, your pension or Provident fund, your two-thirds has to be into some kind of an annuity, and one of them is the living annuity and then you're allowed to withdraw between two and a half and 17.5% per annum. What they've done is they've relaxed or reduced their monthly or the income drawdown rate so now you're allowed to withdraw from 0.5% to 20% per annum and that can be broken down on a monthly/quarterly bi-annual or annual basis.

[12:56] And the reason for them really doing that is if you look on the lower end, the 0.5% is for those that don't really want to draw the income and rather want that capital to grow given the market's pull down so much so they want that to recover, and in the higher end of the 20% is more for the people that are needing that additional income so that they can draw that amount. So for now, it's from the 1st of June to the 30th of September. After the relief period, then you'll go back to your original annuity drawdown rates or they could extend this relief period past.

Laura: [13:36] Okay, so it's not going to be forever. It's just the current situation and they might extend it.

Ryan: [13:41] It's just that the current during COVID-19, so during this phase, it's almost like they're giving the client the relief, but at the same time this has been a topic going on for quite a while now so with these changes we could see some permanent changes going forward.

Laura: [14:03] Okay. I think we touched on this briefly, but we need to just clarify what happens if a consumer defaults on their RA payments, especially now with what's going on, so they cannot afford that monthly payment?

Ryan: [14:15] Yes, so that takes me back to that same one where I mentioned whether it's an insurance type retirement product or a new generation. So the new generation retirement annuities you can stop that payment straight away. You just got to submit the relevant paperwork through your advisor or the different product provider. If it's an insurance type, reducing or stopping those monthly debit orders could have a negative or there could be a penalty attached to that. So before you do anything rather query, get a paid-up quote or ask your advisor to get a paid-up quote, just so you can make sure that there aren't any unnecessary penalties due to reducing your monthly payment or stopping it in total.

Laura: [15:02] Okay, so basically a consumer should really make sure before doing any of this, like you say, to actually find out exactly the penalties or what they can actually do about it before actually stopping and saying I can't afford it and then just not making the payments.

Ryan: [15:17] Exactly, and at the same time everyone, even if you're not thinking about reducing your or stopping your monthly payments, you should find out what your retirement annuity penalties are or the fees that are tied in. Whether you've got an existing one or you're starting a new one, always have a look at what the costs involved and if there are any early termination penalties attached to that product.

Laura: [15:46] I'm not going to lie at one stage I was thinking of reducing mine, but there's a part of me saying, it's like, what you mentioned before, it's a forced saving so I stopped thinking of it as something to reduce and I just kept it aside and saying that's my savings.

Ryan: [15:59] Yes. It's like you said, you got to have a look at it's either the forced savings or you getting the tax breaks so that additional amount you're putting in that return is compounding until you do retire so there are benefits there, but at the same time, like I said, you don't want to have all your eggs in one basket and purely rely on a retirement annuity product at retirement. You kind of want to have a split between your discretionary and your [compulsory? 16:32].

Laura: [16:35] Okay, so then on a final note, do you see any opportunities in the market at the moment?

Ryan: [16:40] Yes, so obviously given the pullback and the impact on the markets at the time, there were a lot of companies that were sold that had great balance sheets. They had dedicated consumers, they were brilliantly run businesses and they were impacted just as hard as the likes. So you would have seen in your unit trust, share portfolios, retirement annuities and the likes, that equity component would have been re-balanced and your portfolio managers would have taken advantage of that pullback. Currently, if I can quickly mention a few data points, if we have a look at the S&P 500 and the all-shares as an example, both of them were down from their highs in March, were down to the low after COVID-19, they both pulled back roughly 32% in their currencies, so in dollars and in rands.

[17:34] The returns since the lows of the COVID-19 S&P500's given you about 34%. The all-shares returned about 30% since that low, so if you have a look what the market's still, or if you want to call it outstanding return, that it still owes you from the highs pre COVID-19, it's about 10% in the S&P 500 and 12%in the all-share index. So there is still a lot of return out there, but you've going to be very selective on your stock picks, but you would have seen in your portfolios, managers have realigned, the likes of SA Banks, selected [inaudible 18:19] stocks would have been added to your portfolio given the upside.

[18:22] Then on the offshore side, S&P 500 or the US stocks have rallied and you'll more than likely start seeing a tilt to emerging market equities or Europe that's slightly more attractive. And then given that it's retirement annuities, you do have a lot of exposure to bonds and during COVID-19 we had our bond yield shoot all the way up to about 11/12%, and a lot of managers would have added those to your portfolios. And the attractiveness of the bonds you're looking at attractive real yields of an excess of 4% and real yield meaning it's after inflation, so it's very attractive from that point of view.

Laura: [19:08] Actually you know what after this podcast I think I'm going to look at my portfolio and see what my advisor has done. Okay.

Ryan: [19:19] Yes, but I think it's always very important during these times and it gets you back to that annual review, at least the minimum annual review that you always check that things are in line, working as they should be and then if not you either got to make adjustments on your investment side or you make adjustments on what you're currently spending.

Laura: [19:43] Yes absolutely. Okay, thank you, Ryan, for taking the time to be on our podcast. We really do appreciate your valuable input and to our listeners, stay safe and thank you for listening.

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