You cannot outsource your future

In today’s newsletter we take a look at the findings and trends coming out of the latest Old Mutual Retirement Funds Survey. The findings were presented yesterday in Johannesburg and they show awareness of retirement issues, but also some less than favourable realities. And while these may be concerning – at least we know what they are. Service executive at Old Mutual Corporate, Mkuseli Mbomvu gave the following quote yesterday – a problem well defined is a problem half solved. At one glance the facts and figures, perceptions and realities around retirement in South Africa look like a huge problem. Throw that glass out – and it becomes obvious that this is also an area of immense opportunity.



The Money Marketing Newsletter will be participating in the long weekend coming up and will not be appearing next week. We wish you all a very safe long weekend that is filled with happiness and relaxation.


Retiring financially independent

6% of South Africans retire financially independent. Craig Aitchison, MD of Old Mutual Actuaries and Consultants says we need to look at this as these 6% being able to retire with no change in standard of living.


A quarter receive assistance from family members

In the Old Mutual Retirement Monitor, 53% of pensioners surveyed felt a drop in their standard of living when they retired and 25% said this drop was a big one. Only 17% felt that their pension had kept up with inflation, 51% said it was a bit behind inflation and a third felt it was far behind inflation.

On average – pensioners said that their pension meets 77% of their retirement needs. 23% currently receive financial assistance from their children or other family members – and this assistance amounts to almost a quarter of their monthly income.

These are the findings of the first Old Mutual Retirement Monitor, which examines pre-retirement perceptions amongst working South Africans. The Monitor also surveyed pensioners.

(The Old Mutual Retirement Monitor and Old Mutual Retirement Survey are two different research projects. The Old Mutual Retirement Survey aims to understand changes in the retirement industry and looks at a range of issues from perceptions of the industry, governance, types of funds and investments and communication to fund members. The Monitor surveyed primarily working metropolitan households and the Survey collected data from funds, government, media and industry bodies, trustees and intermediaries.)

Where the money comes from

While the pensioners surveyed in the Monitor on average said that 77% of their pension meets their needs, those in pre-retirement and saving for retirement with a pension fund said that they expected 60% of their post retirement income to come from a pension. Other sources include retirement annuities, cash savings, endowments and other income (eg working after retirement part time). Of those who are not members of a pension/provident fund they expect 48% of their retirement income to come from cash savings.

One of the emerging trends that the Old Mutual Retirement Fund Survey found was a move to a later retirement date. In South Africa, Seelan Gobalsamy, MD of Old Mutual Corporate, says that we are starting to see people asking the question about retirement date and age. People are retiring – and then in some cases contracting back or entering the SME market. Supplementing income in retirement was also borne out in the Monitor findings – where pre-retirees expect some funds to come from other sources including working – and those who don’t belong to a pension fund are probably more likely to work for longer.

When it comes to retirement from an individual perspective – the ultimate goal is to make sure the money outlasts the individual.


So is there enough to retire on?

The Survey found that only 43% of members think they have enough to retire on. Not enough funds measure adequacy – the Survey found that only 52% of funds measure adequacy.

Preservation does not happen

Preservation remains almost non-existent – 93% of those interviewed in the Survey agree that preserving retirement savings is important – but 99% of those that exited Old Mutual Umbrella Funds last year did not preserve. And while often, cash is needed when employment ends (particularly noteworthy in South Africa where unemployment is such a problem); the survey found that there is a higher level of awareness around the cash option when leaving a fund rather than preservation, and a lack of understanding of the consequences of not preserving. Intermediaries who responded in the Survey are one of the keenest proponents of preserving.

Communication and understanding of the retirement issues

One of the most notable points to come out of the findings was the low level of member engagement on funds and awareness of the issues.

While communication with members was highlighted as an ongoing trend – it seems that this is an area where we still have a long way to go. The Survey found that communication to members was still largely printed material and that despite the continued emphasis on communication; there were still low levels of understanding. Hugh Hacking, Umbrella Fund product manager at Old Mutual Corporate says that an increasing number of funds have recognised the shortcomings of relying on written material and in line with member preference – personal communication (like workshops) is more popular.

This was also evident in the Monitor findings.

The Monitor found that pre-retirees are largely unaware of the trustees of the fund, the investment managers and types of assets the fund invests in.

Only 20% know the trustees by name, 30% know which company the trustees are from. Only 15% voted in the most recent trustee election. 45% know who manages the investment but only 24% claim good knowledge of where the assets of their retirement fund are invested. (18% are vague and 58% don’t know where the assets are invested.)

Despite this low level of engagement there is a high level of trust and confidence in trustees. On a scale of 1 – 10 where 10 is completely confident – both trust and confidence score 7.3. (the trustees are making decisions in the interests of the members and that members are confident in the abilities and knowledge of the trustees). Aitchison says this is more a confidence in the office of trustee – so members view a trustee, by virtue of being a trustee, as acting in their best interests.

The levels of knowledge become more disturbing - 65% of those surveyed in the Monitor don’t know what percentage of their salary they contribute to their retirement fund. (67% contribute less than 10% of their salary to a retirement fund each month.)

Member communication and knowledge is clearly an area where there is massive opportunity. From the findings it would be logical to deduce that current member communication is having very little impact. If only 15% of members are voting for trustees and various findings show that knowledge around retirement funds are limited at best, the need for clear, new, innovative and professional financial education at all levels is evident. We need to ask questions that go right back to basics. Financial education has never been so important.

Questions to ask:

Do you belong to a retirement fund, what is this fund, where is it invested, who are the trustees, how are investment decisions made, who makes these decisions, what do they base their decisions on, how do they know what your needs are? And if you are not in a fund ask the same questions – of your current financial plan (or get a plan). If you are invited to a workshop or presentation on the pension fund – go. When you need to vote for trustees ask them who and what they are and how they will manage the fund.

It is good that we are saving for retirement. It is not good that we don’t know enough about it.

Start out from a basis of knowledge and responsibility

Retirement is a long term liability. As important as it is to minimise short term debt, it is even more important to provide for long term debt. It is not easy providing for retirement, we have to save a lot (even with the latest rate cut), and it will involve sacrifices. It is a responsible action and it is an individual responsibility.

The retirement landscape has changed enormously in a short space of time. Defined benefit has given way to defined contribution, (and it seems from the surveys that knowledge on this is also sketchy) and we have dramatically increased our life expectancy (often with a higher associated cost). We also have to deal with the spectre of inflation.

Rightly or wrongly funding for retirement has become the individual’s responsibility.

The Monitor findings show that there is still a perception that someone else (eg state) will provide. This is unlikely (and is even more unlikely to be sufficient). We have to provide. We cannot outsource our future to someone we think will do a good job – we have to ask the questions and find the information to make sure that the best as is possible is done.

The responsibility shift to the individual has not meant that the industry has become more understandable to the individual. There is an awareness of the need to and the importance of saving for retirement – but the intricacies and details have not reached the individual. This is a responsibility we all need to take. As members and savers we need to speak up.

Become a difficult member and consumer

Ask every question you need to until you get an answer you understand and are satisfied with.

Be aware of investment returns – and that investment returns while an important part of your goal are not your goal. The goal is to retire financially independent.

Make sure that at least five years to retirement you have as comprehensive a review as possible and start looking at your objectives and options on retirement from funds and other investments – what kind of an annuity are you looking to buy, how much should you derisk and into what investments, can you keep investing if there is supplementary income, what are the inflation expectations and how will they affect in the long and short term.

While retirement may not be a certain future for all of us - it is a certain and long future for a lot of us. Just as avoiding tax is a very unwise thing to do – so too is avoiding the retirement issues.

The opinion and comment in this newsletter is opinion and comment only and does not constitute financial advice in any way – please consult a professional adviser for all retirement and investment needs.

Source: Money Market Newsletter (no: 250310)

 8 Good Reasons why you should have a Retirement Annuity

1. Contributions tax deductible up to



a. 15% of non-retirement funding taxable income, or
b. R3500 minus allowable pension fund contributions, or
c. R1750


2. During the investment term savings within retirement funds is not taxed.


3. Tax treatment of one third cash lump sum of retirement annuity proceeds.
a. Tax free portion: R300 000 plus contributions made to retirement funds which were previously     disallowed as a deduction.
b. Less tax-free portions of retirement funds already utilized


4. Two thirds of retirement annuity proceeds to purchase a compulsory annuity.


a. Wide choice of annuity options
b. Can be guaranteed for a fixed term, or
c. Guaranteed income for life
d. Taxable as income


5. Protected against claims from creditors – with certain exceptions.


6. Protected in case of emigration – the remittal of retirement annuities must always take place with the approval of the exchange control annuities.


7. Investors have the option to increase contributions to combat the effect of inflation.


8. A retirement annuity allows disciplined savings for retirement and is also ideal for self-employed persons or small businesses.

Life Cover... How much should I have?

There’s no point in taking out life cover if the amount does not cover the following:

• Enough money to assist with minor children education, housing, general day to day expenses ie food, clothing etc.

• Pay off the bond on your property and any other debt that you may have ie car, credit cards, clothing accounts etc

The amount of cover that each person requires is calculated on an individual basis and need to take the following factors into consideration:


• Age
• Marital status
• Do you have kids, how many and their ages
• Outstanding debt
• Current income as your income provided for your family’s needs
• Funeral costs
• Money you may owe SARS
• Estate Duty
• Capital Gains Tax
• Inflation – R1 million may be enough for now but will it be enough in 10 years?


All the above obviously needs to take into consideration affordability from your side, ie the monthly premiums. Your premiums will depend on your age, whether you’re a smoker or not, current health, genetic diseases looking at your family history.


You may contact me at any time to discuss your personal needs or if you want me to review your existing Financial Plan.

Medical Aid... A Necessity?

I believe that its time to chat about medical aids and what we expect of a medical aid. Medical aids are like cars, the smaller and cheaper the car, the less “gadgets” or “add-ons” are available. So when paying R300 per month for a medical aid, you cannot expect to get the same benefits as a person that pays R3000 per month for a medical aid.

In saying the above I need to also explain that there’s benefits that schemes are obliged to pay even if you are on the cheapest option available. These benefits are called “Prescribed Minimum Benefits” , the there’s currently 270 of these and they are listed on the Council for Medical Schemes website: www.medicalschemes.com

Should you want me to discuss these in detail, I am quite happy to do so.

Let’s now talk about the various types of medical aids available. In general there’s Open Schemes and Closed Schemes.

Closed Schemes are schemes where membership is available to only certain members. Ie Sasolmed – only Sasol Employees can belong to Sasolmed.

Open schemes are schemes where membership is open to anyone that applies. Contributions can only take into account the option on the scheme selected, family size, income (this is not applicable on all medical schemes). One other factor that may affect your premium would be the “Late Joiner Penalty”, this only applies to people who have not been on medicals schemes for long periods of time.

I believe that it’s a necessity as care in public facilities are not what its meant to be due to shortage of skilled staff, facilities not well looked after etc. Hence the whole debate around NHI (National Health Insurance)

When selecting a medical scheme there’s some important factors that need to be taken into consideration.

• Solvency level of scheme

• Size of scheme – ie has membership grown?

• Claims paying ability of scheme

• Average age of the scheme, is the scheme attracting younger members?

• Average increases over last 5 years

• Administration, will it be easy to deal with the scheme, ie do they keep you updated with any status of your claims?

• Selecting an appropriate broker/ financial planner that knows the industry and can assist when you don’t understand the workings of a scheme, or when you struggle to get claims paid.

Don’t wait till you get sick to join the medical aid. Every medical scheme has the right to apply 3 months general waiting period and/or 12 month conditions specific exclusion.

What if you get in a car accident? Do you want to lie in a long que waiting to be treated in a public facility? If cost an issue, join a hospital cover option to start off with, at least you’ll have full cover when hospitilised.

The Mechanics of a Buy and Sell Agreement

A buy and sell agreement is a legally binding contract which on the death or disability of a partner forces the remaining partners to buy the deceased / disabled partner’s interest and forces the deceased’s estate / disabled partner to sell the interest at a predetermined price (or method of determining the price).

Life assurance is merely a way to finance the buy and sell transaction. The partners may finance the transaction in other ways, for instance with their own capital or incurred debt. However as stated before, life assurance is generally the most cost0effective and practical way to do so.

It is very important that a buy and sell agreement is structured correctly.

• Each partner must take out cover on the lives of the other partner. The owner(s) of a policy is therefore someone other than the life assured.

• The proceeds of the policy must be utilized to purchase a share in the business and/or a claim against the business (for instance a credit loan account)

• No partner must pay any premiums of a policy on his own life.

A wrongly structured buy and sell agreement will result in estate duty being levied on the proceeds. For example, where each partner owns a policy on his own life with the other partner as a beneficiary, the proceeds will attract estate duty. There will also be uncertainty in such a case, as each partner can change his/her beneficiary nominations without the other partner knowing.
HOW DO YOU VALUE THE BUSINESS

As the buy and sell agreement provides for a predermined price at which each partner’s interest will be bought, the first step is to place a value on the business. This is usually the domain of accountants, where factors such as the business’s profits and the value of assets are taken into account.

There are however certain factors not found in the financial statements of the business which can affect its value, for instance:

• How dependant is the business on the unique skills of the owners?

• How strong is the brand / what is the value of the goodwill attached to the business?

• Does the business have a sustainable competitive advantage?

• How are other companies in the same industry performing?

• How sensitive is the company to economic changes?
Each business is unique and each Buy and Sell agreement should therefore be structured around each business’s needs.

Retirement Planning (Continued)

Start saving early

 If you save 15% of your salary from the age of 25, only a third of the benefit you receive at retirement will come from your contributions. The rest will be from growth.

 The sooner you start saving the sooner you can earn interest on your savings and then earn interest (compound interest)

 Another way of looking at it is how much more you will have to save to get 90% of your salary at retirement

Starting age 25 35 45

Percentage of salary you need to save in order to achieve 90% income at retirement:

15% at the age of 25; 25% at the age of 35; 47% at the age of 45

Save your bonus

You can build up your retirement “bonus” by taking advantage of the tax free allowance and saving 15% of each bonus into a retirement vehicle.

Don’t cash out your savings before retirement

 A recent Alexander Forbes survey showed that people cash out their pensions 90% of the time when changing jobs and end up paying tax on their savings

 If you contribute 15% of your salary to retirement savings for 5 years, your pension will be equal to about one year’s salary.

Are you a small Business Owner?

Have you taken the time to think what will happen with your business interest in the event of your death or disability?

Do you have a plan in place to transfer your share of the business to your partners, or will your spouse inherit your share? Will your spouse get along with your partners? Will your spouse be able to sell the share at a fair price? Will your partners have the means to buy your share? Will your spouse have to work in order to receive any value out of the business? Is it possible that an outside party will become a partner?

If you are concerned about these questions, you need a buy and sell agreement.

What is a buy and sell agreement?

You and your business partners agree that in the event of any of you dying or becoming permanently disabled, the other partner(s) will buy (and the deceased ‘s estate or disabled partner will sell) the deceased or disabled partner’s share in the business at a predetermined price .

The transaction can be funded by

• Cash in hand

• A bank loan by the remaining partners or

• Each partner taking out life and disability cover on the partners’ lives.

Life assurance is generally the most cost-effective and practical way to fund a buy and sell agreement. And it provides the ideal solution. How?

• It provides your family with immediate capital in the event of your death or disability

• It ensures the continuity of the business in the event of any of your partner’s death or disability.

Reasons why you need a buy and sell agreement

Without an agreement in place, there are potential negative implications for you, your spouse and children as well as for the business and the remaining partners.

Implications for you, your spouse and children:

• You/your spouse could remain a passive partner and share the profits – this may lead to the remaining partners wanting to reinvest profit for growth or increase their salaries to minimize profit.

• You/ your spouse could sell the business interests to the remaining partners – this may lead to the remaining parties not having the necessary funds/ they may underpay.

• You/your spouse could sell the business interest to an outside party – this may lead to a below market-related price as it’s a forced sale

• Your spouse could become involved in the management of the business – your spouse and the remaining partners may not get along / your spouse may not have the right skills set.

• Your spouse and partners may not agree on a fair price – this could delay the winding up of your estate.



Implications for the business

• Your partner/ spouse may want to sell their business interest – you may not have enough funds or have to incur significant debt.

• Your partner/ souse may demand an unrealistic price – negotiations may become deadlocked and business continuity may be affected.

• Your partner/spouse may sell his/her business interest to an outside party – you may not get along or may not trust the outside party.



We will discuss the valuation of your business together with a couple of examples as to how to structure a buy and sell agreement to follow in next article