How to reduce risk
As a financial planner, I believe the area most under-appreciated or planned for, is retirement.
The irony is that it is also the most likely financial event to happen. Historically, the focus has been more towards risk planning, such as life cover in the event of death or disability. It doesn’t mean these events are not important to plan for, it just means we don’t do enough or proper financial planning. Another common mistake is we don’t review our portfolio often enough.
Markets change, goals change, circumstances change… So, we need to adapt the plan to these changes. Annual reviews of our overall portfolio allow us to adapt to these changes. It’s like going on a road trip, you need a destination. You then need to know how much petrol and other expenses you’ll need to budget for the trip. You also need to know what you want out of the trip, what brings you joy. So too with your portfolio, you need to plan the finer details and budget.
Don’t have a Pension or Provident Fund?
People often look at their policies with their advisor when they do a review, but a lot of people leave out a critical part of their plan…. their company Provident or Pension Fund. Did you know that you have a choice or input towards the actual funds you are invested in on your fund? Why is that important? Well, it is common for the average guy in the street to contribute more towards his pension within the company than in his personal capacity towards and RA. That means the biggest portion of your retirement plan could come from the company Provident or Pension Fund. Yet, we don’t include it when we sit with our financial advisor.
So, what are the things we need to take into account when we review this portion of the plan? Your Provident or Pension fund will have a default fund that will be selected if you have not selected your own funds. Usually, this would be a safer bet or conservative fund aimed at protecting capital. Great if you are close to retirement, not so great if you are young and can afford to take risks because you have time on your side. The younger you are, the more equity one should have in the funds used, because equity over a prolonged period outperforms cash and bonds. The closer you are to retirement, the less risk you should take with your funds and the less equity you should have. But this should be an exercise you do with your advisor.
Another part of your Provident or Pension fund, you need to look at is the risk portion. Most funds offer two parts, the investment part which contributes to your pension funding after retirement, and the other part being the risk portion, which covers the risk of death, disability together with dread disease pre-retirement. The reason you need to look at the risk portion too is that you may be over-insured and wasting money. An example of this is income protection. You can’t insure your income for more than 100% for the first two years of claim or at 75% for the years thereafter. So, you may have income protection on your Provident Fund and in your personal capacity on your own policies. You could be paying for a benefit that won’t pay out.
It’s for these reasons why you need to sit with all the information, including your Provident or Pension fund details, with your advisor. This will add to proper financial planning and no hidden or unexpected surprises.
The company Provident or Pension fund may have their own advisor, who should also offer you some sort of counseling to ensure you understand the benefits of the fund you are in. If they haven’t let us know.
Another important factor, he /she should point out is the “free medical limit”. This is the amount of life cover that the fund offers without doing underwriting. An example of this is that the “Free medical limit” may be R500,000.00 and your life cover may be 4 x annual salary, which may equate to R1 Million, as an example. This means that if you don’t do their medical underwriting, on death they will only pay out the R500,000.00. So, check your benefit statement and read the whole document to have a full understanding of what you are covered for and what you are not.
Another point to bear in mind is the beneficiaries on the Provident or Pension fund. Just like any other policy, you must nominate a beneficiary. Ensure that you have done this and that your HR contact person is aware of this. Also note that even though you have nominated a beneficiary, with the Pensions fund act, this may be changed by the trustees on your demise under exceptional circumstances. People often aren’t aware of this, but if a dependant can prove dependency to the trustees of your fund, they are entitled to lay a claim to your Provident or Pension fund on your death.
So, as you can see, there are many reasons to take your Provident or Pension fund into account when sitting with your advisor. The 2018 budget speech is guaranteed to pose some interesting challenges for each South African. We hope that this advice will assist you in getting to the golden goal of retirement, having minimized your risk in relation to current economic conditions.
For advice like this or any other areas of financial planning, please feel free to contact us at Stringfellow Advisory Services. (SAS).
Are you covered?
Do you need a retirement fund? The simple answer is yes. But knowing how much to you’ll need can be tricky.
If you haven’t started your retirement funding, Stringfellow offers a wide range of solutions and will custom build your solution.
If you would like advice on retirement or investment opportunities, please do not hesitate to contact the Stringfellow team. We’re here to help.
Original photograph: Kelly Sikkema