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Questions about a 'forgotten' retirement annuity

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A Fin24 user wants to know what the options are regarding a retirement annuity his mother has "forgotten about". He writes:

My mom has an retirement annuity (RA) that she has kind of forgotten about and now wants to start up again.

The monthly payment was probably the minimum that was required in the 1990s.

The current value is sitting at about R40 000. What would be the best way to invest this money to receive the maximum return on it over the next 17 years?

Should she just carry on contributing towards it and forget about it again or start a unit trust or endowment and build something from the monthly contributions in addition to her RA.

She does not earn a particularly massive salary.

Then, my dad does not believe in investments and policies. What would be the best way for him to save for retirement? Something similar to the way I mentioned above for my mother?

Lizl Budhram, head of advice at Old Mutual, responds:

Your mother has done very well maintaining her RA (retirement annuity) for so many years. It is also very good news that she still has 17 years left to make provision for her retirement, as this is a considerable amount of time during which she can save and invest astutely.
 
It is important to note that no investment expert or financial adviser will be able to answer the question about the best way to invest her money to receive the maximum return on the investment over the next 17 years. One would need a crystal ball to be able to answer such a question.

The sensible next step is rather to consult with a financial adviser, who can help your mother take all relevant circumstances into account: her retirement date and retirement income requirements, as well as what she is able to afford currently would be some of the most important considerations.

She may do well to increase her monthly payment to the RA to utilise the full tax deductible contribution, provided she is able to afford such an increased contribution.

If she can afford even more than the tax deductible contribution or she does not like the investment or liquidity constraints attached to an RA, she should consider alternative investment vehicles, such as unit trusts or an endowments.

In March 2015 a new investment vehicle is expected to be added to the current options. This vehicle will have special tax benefits and will be completely liquid.

Whichever options will prove more appropriate, your mother should not delay in seeking sound investment and retirement advice. She can put her investment and retirement plan in place now and utilise the benefits of the new savings vehicle (if appropriate to her needs) when it becomes available.
 
The funds in which the current value of R40 000 is invested also need to be scrutinised and discussed with your mother to ensure that the investment risk is appropriate. She should be able to take some investment risk with this investment to ensure good inflation-beating returns, since her remaining investment period is 17 years.

It is important to understand the impact of the investment guidelines and limitations as to the underlying investment classes she may invest in which further reinforce the value and importance of advice.

Your father's retirement

If you father’s preference is to steer clear of financial services investment vehicles and policies, there are plenty of other options he can use to provide for his retirement.

The most appropriate option would depend entirely on him. He can consider starting or buying a business, investing in residential, commercial or industrial property or investing in art.

It is important that the option he selects generates sufficient inflation-beating capital growth and/or continuous income to be used for retirement purposes.
 
It is also important to understand the method of contribution, be it on a regular recurring monthly basis or a once-off single contribution.

Investing on a regular monthly basis does perhaps restrict the investment options to an extent and a structured investment such as a retirement annuity, unit trust or endowment does make access to a retirement investment easier.

Other considerations to be discussed with your father in a financial consultation would be his need for liquidity, his risk profile, investment time frame and current income tax positions as well as his post retirement income needs analysis.

Probably the most important thing to bear in mind is the need to take action and get the necessary financial plans in place as soon as possible. Every day delayed is a day of growth and opportunity lost.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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