WOUTER FOURIE: Default strategy may not always be the best option for retirees

14 April 2019 - 00:05 By Wouter Fourie

A new set of regulations kicked in at the start of March that will benefit you as a new retiree who is overwhelmed with choices in this new phase of your life, but you should not see it as an alternative to appropriate financial planning.
Called the "default regulations", these new laws force pension funds to offer you a default annuity strategy if you have to, or don't want to, choose what happens with your retirement savings once you stop working.
In these instances, the law now requires that the pension fund offers a default option that is the same for all members. It states that this default option be "reasonable", that fees be "fair" and that it is communicated well to all members.
For many retirees, having a default option seems like a gift from the retirement industry.
There are so many choices to make when you retire, each with its own tax implications and fees, and all of them require you to have a level of knowledge and participation. Now, it seems, you can simply ignore all those letters and calls from your retirement fund and they will make the choice for you.
At face value the default option seems like a good idea because the default regulations require the default fund option to be affordable and fair and because the fund usually knows what is best, it seems like not having to make a choice is in fact the safest choice and investment selection.
Many new retirees and people with only a few years of formal employment left will also argue that choosing the default option is far better than trying to become a tax, investment and financial planning specialist and managing your own funds.
Indeed, for those retirees who are wholly unprepared for the pending financial decisions, it may feel like this new default option is a safer bet than to be forced into a quick, and very often bad, decision by an unscrupulous and commission-driven "adviser".
However, you should not assume that any default fund will automatically protect your funds and provide a livable monthly pension for the next 20, 30 or even 40 years.
Your future pension payment still depends on the amount you have saved while working and the performance of the investments.
Also, there is no provision in the new default regulations that forces funds to ensure the money you receive keeps track with inflation or your personal goals and living costs.
At the same time, choosing the default option means you may lose out on many other provisions in the new rules that could have saved you a lot of money.
For instance, the new regulations allow you to stay in your employer-sponsored fund even after you have retired. If, for example, you retire but still do some work for your old employer, or you still earn money from a side hustle, you may want to postpone moving out of your employer fund with its low fees and active management.
The same applies to the tax benefits. A good adviser can help you to withdraw a certain portion of your retirement funds tax free and reinvest it or help you pay off large loans, which will benefit you greatly when it comes to living on your monthly retirement payout later in life.
It seems pension funds also recognise the inherent risk in providing a default option as, while they have to communicate the new default option to members, they ask you to seek responsible advice and to be an active participant in your retirement planning.
By responsible advice we usually mean independent financial advisers who are not affiliated to a single financial institution and charge an advice fee rather than make their living purely from commissions on the sale of investment products.
They should also be suitably qualified, ideally with the Certified Financial Planner (CFP) professional designation and a member in good standing of the Financial Planning Institute (FPI).
Seek advice while you are working and try to gain as much knowledge as possible to help you make an informed choice. After all, it will have a meaningful impact on your income in the last third of your life.
• Fourie is the MD of Independent Wealth Managers and 2015/2016 FPI Financial Planner of the Year..

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