Is your pension safe?

And over the past few days, the global equities sell-off has just ballooned, as fear grips investors and they dump their shares.

While there's no doubt that the global financial crisis is eating away at people's life savings, how bad is the damage and is there any way to emerge relatively unscathed?

As the global financial crisis hits stock markets hard, "South Africans' pension values will drop as the stock markets drop," says Galileo Capital director Warren Ingram.

"But it's not usually a crisis if people leave their pension funds invested and allow them to recover. Unfortunately people tend to panic in these situations and move their pension funds into cash which is the worst thing to do after a market correction."

Rowan Raath, a Financial Consultant at Liberty Life, says: "For guys on the verge of retiring this sentiment can be nerve-wracking.

"Most markets are dropping due to the pessimism surrounding serious cashflow and credit problems in the US, which some are comparing to the Great Depression of 1929, and not because of the operational performance of companies listed on the JSE, which is good news."

To understand the impact of the crisis on local pension funds, let's go through the investing options available to pensioners.

Most people prepare for retirement with the pension or provident fund* that their companies provide them with, or through a retirement annuity (RA) that they put money into independently (where the savings cannot be touched until the person is 55 years old or emigrates).

When it comes to retirement, pensioners have two pension options: life or living annuities. In both instances, tax is not paid on the amount used to buy the annuity.

Life annuities pay out a regular sum each month for a fixed period, but there's no accrual to your estate unless life insurance is built into the contract. In some instances, these annuities are linked to inflation.

With living annuities, your money is invested in a portfolio of equities, bonds, cash and property, with your monthly payments fluctuating in line with the performance of the underlying assets, which means that you bear the risk. The balance remaining in the annuity is passed on to your estate when you die. Between 2.5% to 17.5% can be drawn from the capital value of a living annuity. The amount you draw, however, is taxable; also the less you have invested, the lower your payout, so the less you draw, the better.

Living annuities, which are the more common option these days, according to Ingram, are susceptible to market fluctuations, making them more risky. "This means that a person who retires on 30 September may have a smaller capital amount but if you move that capital into a balanced fund in a living annuity then the value can recover," says Ingram.

According to Douglas Clarke, a financial advisor at DMWC Consultants, pension funds, provident funds and living annuities are all at risk in terms of the moves in the market, but they can recover.

"When people move to cash [when equities aren't performing well], they lock in their losses already," says Clarke.

Raath gave the example of investors' reaction to the rapid weakening of the Rand at the end of 2001: "Then, at the worst the rand was trading at about 13.6 to the dollar. People got worried, and they put all their money offshore. Over the next few years the rand strengthened, with the result that people lost money."

Ingram says that negative market swings will not necessarily harm the performance of an RA unless the member of the RA decides to move to cash after the market has fallen. "This means that the RA will not grow in line with the stock market once it recovers," says Ingram.

Time vs timing

There is an old saying that it's 'time in the market, not timing the market', that yields the best returns.

"You have to look at the long-term fundamentals instead of trying to time the market," says Raath. "It's a fact: no-one knows if today will be the day that markets will grow. Economists and investment fund managers do time it to a certain extent by making minor adjustments to rebalance their portfolios based on the general sentiment, but they have their mandates that they stick to."

All commentators Fin24.com spoke to say that the closer you get to retirement, the more you should shift from an aggressive portfolio (which normally comprises shares and property) to a more conservative one (which is mainly in bonds and cash).

"Those who can't stand the roller coaster ride have to balance their investment out. So they invest in a portfolio that has both conservative and aggressive assets to lower the risk," said Sunél Veldtman, a private clients services director at Barnard Jacobs Mellet.

According to Veldtman, shares have historically grown at a rate of 15% a year, while property grows on average 12% a year. In comparison, bonds and cash, while more stable, grow at a slower rate each year - 9% and 6% respectively.

"But I advise you to have a financial advisor who can help you, not a broker who just wants to sell you things. You have got a long time to live and you need the advice so that your money can last longer," she said.

*With a pension fund, people are obliged to buy a pension (life or living annuity) with two thirds of the money paid to them. With a provident fund, all the money saved over the life of the fund is available.

- Fin24.com