Question

I have just been retrenched and have received some documents from my employer. They talk about in-fund preservation and a continuation option on risk benefits.

Answer

It is difficult to give you an answer without seeing the details of your fund. I will, however, talk in general about these issues and flag what you need to watch out for.

In-fund preservation means that you leave your money in the pension fund when you leave the company. Your money continues to grow and this growth will be determined by the growth in the underlying portfolios as well as the charges levied.

This is where you need to be careful. I have seen several funds where there is a very limited range of portfolios on offer. One of my clients who was retrenched was only able to invest in a moderate portfolio. This was the wrong one for her as she is still young and can afford to be in a much more aggressive investment portfolio.

As a retirement investment may not be accessed before you turn 55, a 40-year-old, for example, will have a 15- to 25-year investment horizon. This means that any short-term ups and downs in the market will be smoothed out over time. There is therefore no need to invest in a conservative or guaranteed portfolio at that stage.

Many funds make it attractive for you to leave your money with them by charging a very low admin fee. In some instances, this admin fee is zero. Against this must be weighed the opportunity cost of investing in a portfolio that may not provide the right levels of returns over the longer term. You would need to look at what portfolios are available for in-fund preservation.

If your pension fund returned 5% a year over 25 years, your R1-million would be worth R3.3-million. However, if, by being in a better portfolio, it returned 8% a year over this period, it would be worth R6.8-million. The additional 3% return makes a massive difference over the longer period.

It really makes sense to:

• See what portfolios are available for an in-fund preservation and whether these are appropriate for your needs. If they are, then you should go this route and take advantage of the lower costs.
• Look at other suppliers for a preservation fund and see if their portfolio offering and cost structures work for you.

A decent financial adviser should be able to help you make the right choices. As long as they are conducting proper reviews, it is usually worth paying them a fee to manage the investment. The additional returns from getting an investment specialist to help you select the right portfolios can have a massive effect on your retirement savings.

If you are over 45, have a look at a preservation fund that guarantees you a pension at retirement using today’s annuity rates. This type of product has been around for a while but it hasn’t been that attractive as annuity rates have been poor. However, over the past year annuity rates have improved massively and this type of product is certainly worth considering.

As an example, I had a 63-year-old preserve his R2-million pension like this. He was guaranteed a monthly pension of R24,500 from the age of 65. If, at retirement, he does not want this annuity, he could use the funds for a normal living annuity.

 Continuation option

Many retirement funds offer continuation options on their group risk benefits. This means that you can continue with the risk cover that you enjoyed while working. You would just need to transfer the cover into your own name and pay the premium.

There are sometimes restrictions on the amount of cover that you may take up. You should be able to get this information from your pension fund administrator.

This is a very attractive benefit as you do not have to have any medicals to get the cover. With Covid-19, many of the life insurance companies have become very strict when it comes to underwriting, so this is indeed a benefit that you should consider.

Most retirement funds only allow you to exercise this option within 30 days of leaving them, so you should take up this offer as soon as possible. You can always cancel the policy should you find another job that has got group cover. This will, however, protect you and your family should anything happen to you while you are between jobs.