Question

I have 3 retirement policies through Old Mutual and Sanlam. These will pay out at age 55, 60 and 65. I am now 39 years old. I also have an Absa Money Market account and have been very good with saving in it via debit order. I do not touch the money in my savings account, as I perceive this account to be the same as the policies – don't touch until retirement. I plan to retire at 65.

My question is: I have an extra R250 00 per month at this stage. Do I continue with this into my money market, or should I try to upgrade any of the policies? Further question: I have spoken to a lot of friends/family who all say that policies are a waste of time, as you do save and do get the money at the end of the term, but the taxman takes so much, that you could rather have simply saved into a savings account.

According to my one uncle, he got out less on his policy after saving for 20 years (the same amount in a savings account as well as in a retirement policy).

What would be the best option for me: saving into the money market or an upgrade on the policy? I also get phone calls from eg Sanlam advising me of all kinds of new savings plans.

I don't want to save into such a plan if the taxman will take such a big lump at the end of the period. I would then rather save into a savings account, get monthly interest and be taxed on the interest I earn. I'm sure I will pay less tax that way.

Your opinion would be of great help.

Answer

FINANCE

When a client comes to me, we work through some basic info and I quickly learn what this person's approach is to (for example) saving, taking risk and how that person feels about tax. One of my clients received pension payouts and she wanted to have 24hr access to the funds. This meant a money market account and her amount of interest for a full year will definitely be taxed. When one uses the interest earned on such an account, the money itself cannot grow and keep up with inflation. When the person saves the interest fully, the funds starts to grow bigger and bigger because of this (sure you know it, it's described in more detail for other readers). She wanted access to the money for building projects that was to start in a year or two and when I calculated the nett growth on her money (after tax) it was still very good compared to other options. A policy or retirement annuity (RA) has its place, believe you me! For many years I was very anti-RA's but since then I've seen that with decent planning of which funds your money are invested in and an openess with your FA re. the fees he/she takes as well as the fund manager when you choose the fund (or funds), clients CAN save on them but it's also for clients who don't (or won't save) any other way.

Also I have clients who I'd rather see pay money in their own RA's than to SARS and they also use the tax refunds very disciplined. If you can save up like this and not use the interest so it can grow in capital, it definitely gives good value for money and I will use it with a client who will save like this. Each client's own situation and whether they have a business, is married or not, children, health wise and cover if you cannot work until 65 even if that's your decision now – there are many factors to consider and then I make a plan for the client that is good for him/her.

I'm personally in favour of cash savings and also, I find quite a lot of clients who save on policies but do not know in which funds their premiums are invested – when your FA knows his/her funds and involved in the choosing of it, then you will have good growth on it over a long period over both low and high share markets.

- Charné van der Walt