By the Financial Planning Institute
I want my son to start investing for his future retirement with a retirement annuity when he starts working next year. I worry, though, that if he starts investing at 25 will that company still be around when he's 65?
There are so many horror stories about money going missing, etc. It is worrying how one goes about chosing a reputable company. Do you have any pointers?
Selecting which company to partner with in growing and preserving your retirement capital is an important decision.
Previously, and specifically in the instance of life companies, your retirement capital formed part of a "fund" that essentially fell onto the balance sheet of that Life Company. Despite the fact that most companies offering RAs in the past were large and unlikely to disappear or be liquidated, recent product developments have eased this concern by being structured as "unit trust based".
By going this route, the fund is separate from the company’s balance sheet and the funds are held "in trust". This may be confusing as unit trusts are seen as discretionary investments, which is correct and remain as "stand-alone" investment options outside of an RA.
The best way of thinking about it in this context is to treat the retirement annuity as the administrative platform, with its unique tax benefits and liquidity constraints, through which you have access to a number of unit trust funds managed by various asset managers (or index trackers).
Naturally this "separation" of platform and fund has the benefit of a wider choice of managers and the flexibility to move managers if needed. From a safety perspective, the benefit lies in the legal structure of a unit trust.
In essence, there are four parties to this type of trust:
The trustee which is often one of the four big banks who are mandated by the Master of the High Court to act responsibly and diligently in their custodianship.
An auditor which is usually one of the more prominent auditing companies.
The Management Company which would generally be the asset manager of the investment fund itself.
Lastly and most importantly the investor.
Each of the parties above has a unique and important role to play in the trust.
The trustee has an obligation to ensure that the trust is run in accordance to the deed; the auditor ensures good governance and the management company is responsible for making specific asset allocation and stock selection decisions on behalf of the trust and in accordance to their fund mandate (e.g. balanced, full equity, conservative, etc).
As investors place their money into the trust their share of the trust is divided into "units" which is proportionate to their contribution — the more you put in, the higher number of units will be allocated to you. This is how the name "unit trust" is derived.
From the above, it can be seen that if any one of the parties were to disappear, close down, be liquidated and so on, the trustee would merely appoint another auditor or management company.
Should the trustee cease to exist, the Master of the High Court would appoint a new trustee on your behalf.
All the while, the investor’s capital remains within the trust itself.
With the safety aspect out the way, let’s review a few pointers:
Make use of the maximum tax deductible allowance on your contribution.
Avoid locking yourself into too long a term (ideally, no term but rather have open ended contributions that you can stop/start/reduce/increase at any time without penalties).
Ensure you invest in an investment fund that serves your required objectives. If you are younger, with a longer time frame, you have the opportunity to take on more "risk" by way of equity exposure. However, be certain your risk tolerance can stomach a bumpier ride.
Understand what fees and costs you are paying and keep them to a minimum. This does not suggest that cheapest is best, but be sure to pay where you are going to get value.
Keep disciplined and increase your contributions as your earnings increase.Lastly, get advice and ideally a financial plan. The more informed your decision(s) today, the greater your chance of success tomorrow.