Making the smartest choices
It’s time to rethink retirement savings strategies and investments
As retirement looms, investors are faced with a number of critical decisions regarding how best to use their life savings to secure a regular income after retirement. Should they select a living annuity or a life annuity, how can they best use a tax-free savings account (TFSA), and what retirement products should they consider?
Amid the devastating impact of Covid-19 on the economy, markets and individual savers, many people are questioning the value of local retirement funds, particularly given the threat of prescribed assets and recent changes to legislation, including investment restrictions imposed on SA retirement funds through regulation 28.
In a nutshell, regulation 28 limits equity exposure to 75% of a portfolio, with a maximum limit of 30% in offshore assets and an additional 10% for the rest of Africa.
Given these restrictions, do retirement funds continue to represent a good investment?
Jaco van Tonder, director of advisory services at Ninety One, believes they do offer a good investment given the tax benefits they provide, particularly when compounded over 20 years or more.
There has recently been much debate about the idea of tapping into SA’s significant pension fund assets through prescribed assets. The country’s pension funds hold about R4-trillion in assets.
Commenting on the impact that prescribed assets would have on retirement fund returns, Stephen Katzenellenbogen, Private Wealth
What it means:
Retirement funds are still a good investment, and the new rules are not going to change that manager at NFB Private Wealth Management, says that the returns from infrastructure and related assets have been good globally, which could have a hugely positive impact on retirement fund returns.
However, he adds a caveat: “The SA government and its associated parastatals have a poor history of capital allocation that elicits scorn and contempt rather than investor confidence. As a result, while prescribed assets can theoretically be accretive, we have a long way to go in SA before investors will invest in lossmaking and poorly run SOEs [state-owned enterprises] of their own free will.”
Leveraging TFSAs
TFSAs, which were introduced in 2015 to encourage savings in SA, have become a popular option given that the holder is not liable for any capital gains tax or income tax on the dividends and interest received on the investment. Unlike pension funds and retirement annuities, TFSAs are not restricted in terms of the classes in which the money can be invested.
However, warns Van Tonder, they need to be set up correctly as long-term investments to maximise an investor’s lifetime tax benefit.
What is important to remember is that there are limits to how much one can contribute to a TFSA in a year and over a lifetime.
“Many investors and advisers have underestimated the extent to which the tax benefits of TFSAs compound over time. Unlike a retirement fund, a TFSA is not taxdeductible upfront, which makes it difficult to calculate the rand value of the tax benefits.”
TFSAs allow withdrawals at any time without penalties. However,
an individual’s lifetime tax-free savings allowance can never be recovered once used.
Van Tonder says the TFSA is used as a savings vehicle, but if the investor then spends some of that money, it can never be replaced and that allowance is lost forever.
“Essentially, it counts towards your lifetime cap and there is no top-up option,” he says, adding that this is why it’s important that investors understand that they should not withdraw money unnecessarily from their TFSAs and should rather view these accounts as long-term savings vehicles.
“Due to the lifetime cap, investors are typically only seeing the returns matching or even exceeding their contributions after about 10 years, and it is only after 20 years that the value of the tax saving becomes substantial relative to the size of the original contributions,” he says.
So it doesn’t make sense to use a TFSA for an investment horizon shorter than five years, he says.
Taking a balanced view
Katzenellenbogen says that it’s important to form a balanced view of your savings allocation and to factor in issues such as liquidity both before and after retirement, as well as the tax treatment of postretirement income.
“Ideally, you should be looking to spread your contribution across products that have different tax, liquidity and investment-choice profiles,” he says.
There are advantages and disadvantages to both living annuities and life annuities, and the merits of each product need to be assessed to fulfil the investor’s objective and financial needs, he says.
Another issue that needs to be considered is the service fees being charged on retirement products.
“On the face of it, lower fees are always better in the context of investment returns, because a lower fee on the same investment implies a higher return,” says Katzenellenbogen. “In the context of risk benefits, a lower fee will mean more cover.”
But he cautions that on the flip side lower fees could mean more generic solutions, to save costs from the issuer, which means some investors may not be able to meet their goals. “You also have to check that lower fees do not translate into less access and ease of information for the members.”
New legislation now in effect
On March 1 this year, new laws came into effect to complete the harmonisation of the benefits and rules of provident, provident preservation, pension, pension preservation and retirement annuity funds.
Previously, provident and provident preservation fund members could choose to take up to 100% of their benefits as cash at retirement. With the new rules now in place, benefits from new contributions to provident funds will be subject to the same requirements to purchase an annuity at retirement as pension, pension preservation and retirement annuity fund benefits.
Shaun Duddy, senior manager in product development at Allan Gray, says that at least two thirds of any benefits from new contributions made to a provident fund from March 1 will need to be used to buy an annuity at retirement, unless these benefits in a fund are R247,500 or less – this figure may be amended in future.
The exception is the benefits of provident and provident preservation fund members who were 55 or older on March 1. These members’ benefits are not affected by these changes — unless they have started contributing to a completely new provident fund on or after March 1. For members who were younger than 55 on March 1, the changes affect only new contributions made to provident funds from March 1 onwards.
“All benefits in provident and provident preservation funds before this date, including any future growth on these benefits, are not affected by the changes,” says Duddy. “Benefits that will not be affected by the changes will be given ‘vested rights’ which means that members can still take up to 100% of these ‘vested benefits’ in cash at retirement.”
He says the aim of the broader harmonisation changes is to encourage increased saving for retirement and preservation in annuities at retirement by making changes to and aligning the rules and benefits of retirement funds.
“Importantly, these changes have been introduced in a way that clearly acknowledges the reasonable need for access to cash at retirement, and the importance of protecting members’ previous rights,” he says, adding that this reform has long been a priority of both the National Treasury and industry stakeholders.
The rule changes mean that provident and provident preservation funds become equivalent to pension, pension preservation and retirement annuity funds at the point of retirement.
“There is no question that it is a positive step towards improving retirement outcomes for members,” says Duddy.
“Essentially, the combination of increased savings in retirement funds, encouraged by previously increased tax incentives, and the increased use of annuities to provide an income at retirement, should improve the level of benefits at retirement, as well as the level and sustainability of income in retirement.”
Retirement fund reform confirmed by budget speech
In his budget speech last week, finance minister Tito Mboweni said National Economic Development & Labour Council constituencies have agreed to accelerate the introduction of auto enrolment for all employed workers. They also agreed to the establishment of a fund to cater for workers excluded from pension cover as an urgent intervention towards a comprehensive social security system.
He said draft amendments to regulation 28 will be published for public comment. These amendments aim to make it easier for retirement funds to increase their investment in infrastructure.
The cessation of section 12J in June this year will leave retirement funding, including pension funds, retirement annuities and provident funds, as the only investment option where the premium is tax deductible.
Achieving long-term goals requires discipline, patience and consistency, whether it’s training to run a marathon or planning to retire in comfort. The primary objective or focus point in planning for retirement is capital accumulation.
There are several key enablers to achieving your retirement goals such as compounding returns, asset allocation, diversification, tax benefits and having an adviser as a strategic partner.
Successful retirement planning is about capital accumulation through multiple economic and market cycles.
These cycles have always been there and are likely to continue to be part of the investment landscape. However, if you have time on your side, they can present opportunities, particularly if you are making regular contributions to your retirement savings.
The market is not your portfolio
When considering the traditional asset classes, equities have typically delivered the best real returns over the long term. This attractive real return comes with volatility over shorter periods which is, to some extent, the nature of this asset class.
During a crisis, you will often see headlines about huge losses and double-digit drops in market returns. But the numbers you see in the news are not yours. With a well-diversified portfolio, you will not have exposure to one specific share or company, but will have diversification across asset classes, asset managers, physical locations and even investment strategies.
This means that you will always have exposure to an element in your portfolio that, when optimally combined, acts in a complementary way. Your portfolio is thus better able to withstand fluctuating market conditions, creating smoother returns in the long run.
Strategy over tactics
When investing through a crisis, emotions play a big part in the decision-making process. Panic often leads to reactive decisionmaking and this phenomenon seemed to play out last year.
Data from the Association for Savings & Investment SA shows that some investors either lowered their exposure to, or completely disinvested from, equity in 2020 as news of negative economic growth dominated the narrative.
It is important to note that investors need exposure to growth assets, such as equity, during the accumulation phase to ensure they have enough capital at retirement.
Changing your portfolio allocation based on short-term market events or news can have lasting consequences on your ability to reach your retirement saving goals.
Retirement roadmap
Having a clear vision for your postretirement goals is the starting point to staying persistent and motivated through the long and, at times, challenging journey of saving for retirement. A retirement savings portfolio is an important component of a retirement plan.
There are also other important considerations such as being proactive about your health, deferring expenditure, reducing debt and estate planning that you need to incorporate into your retirement roadmap.
Regularly reviewing the status of your retirement plan with your financial adviser is another important consideration and allows you to measure, evaluate and, if necessary, take action to ensure you stay on track.
Consider that your investment horizon extends beyond retirement. At retirement, a significant portion of your portfolio is then invested into a post-retirement solution.
Market volatility is a natural and inevitable part of investing and those declines are often unpredictable, but history shows that the return profile eventually smooths out over time.
When investing towards your retirement, it’s critical to remain invested in a sensibly diversified portfolio and focus on the longterm rather than responding to market events that may be short-lived. Doing this helps ensure you stay on track to achieve your retirement goals set out as part of your holistic retirement plan.
Always ensure that you consult your financial adviser to craft a retirement plan suited to your retirement needs. PPS Investments offers a range of funds across the risk spectrum to help you and your financial adviser construct a sensibly diversified portfolio that provides growth opportunities as well as downside protection to keep your savings on track during all investment cycles.
Investments
Ad industry salaries have largely remained static in the past 12 months as the sector fights to hold on to accounts, faces diminishing marketing budgets and has in some cases been forced to retrench staff.
This picture emerges from specialist recruitment agency Ad Talent Africa’s Salary Survey 2021: Who Earns What in Adland & Marketing in SA.
An agency MD with over five years’ management experience can expect to earn a minimum of R150,000 a month in Joburg and about R130,000 in Cape Town. An MD with two to five years’ experience will earn R100,000-R150,000 a month and between R90,000 and R150,000 in Cape Town.
These salary scales for the 2021 study are much the same as last year’s, and are not at all surprising.
“Last year was brutal, with salary freezes 123RF/tribalium123
and even reductions,” says a veteran midsize agency owner. “The next year is going to be much the same as the marketing spend pipeline begins to open slowly .T he ad industry right now is not a place where a young, ambitious leader is going to make a lot of money. We are all in for a long, tough haul.”
Ad Talent points out that its survey is not prescriptive but a report on its own placement work over a year. The figures are based on monthly cost to company.
Another agency boss tells the FM it is the two- to five-year band for an MD that is worrying. “It’s long been a trend that many successful agency leaders eventually find a home in the client space, which is much better paid. That means people leading agencies these days do not necessarily have as much experience as the job demands. If that two- to five-year tier is not seeing high salary growth potential, then the upshot is a vacuum in the Csuite of agencies, and that has an impact on growth and profitability.”
The beating heart of any successful agency is its studio and the people who lead it. Again, there has been little if any salary movement over the past year at chief creative officer
(CCO) level. In Joburg, negotiations start at about R108,000 and in Cape Town at R100,000. In recent years, many top-flight CCOs have gone the independent route and hired out their services on a project basis, both locally and internationally.
As more advertising migrates online, digital creative directors and digital copywriters are coming into their own, with the former looking at a salary of about R82,000 in Joburg and R65,000 in Cape Town. Good digital copywriters in Joburg are asking for R70,000 per month.
“This is the one sweet spot for many in the industry. It is a scarce skill and one in demand, and if the person has a strategic brain there is more money on the table,” says a digital agency head. “I suspect R70,000 is an opener; if they’re good they can write their own ticket if they haven’t been snapped up by clients already.” In that respect, data analytics is a skill in high demand and agencies are prepared to pay a little more these days than the R70,000 per month survey numbers.
Ad agencies should also be looking more closely at what they are paying the “suits”, or client-facing staff. A business unit director’s salary in Joburg is about R66,000 a month and R60,000 in Cape Town. It is often a thankless job, balancing the expectations of brand managers against the output skill of agency creative and strategic staff. The reality is that many good client service staff find better-paid jobs with their clients and can then deftly exploit agency deficits because they have been there.