Col 8: Pensioners - Best shorter-term investments

Pensioners need best shorter-term investment returns

By Bruce Cameron
Co-author of The Ultimate guide to Retirement in South Africa

 

Pensioners, getting investments right

Many pensioners spend a lot of their time looking for the best returns on discretionary money that is not locked into a pension fund income (an annuity).

Even a 0,5% better interest will make a difference to how they live. This is particularly the case when less than 6% of retirement fund members retire financially secure. The 6% is likely to drop further as a result of the Covid-19 lockdown, which impacted on retirement savings in many ways.

This is why the 2% to 4% increase over bank rates offered by the property syndications made so many pensioners fall prey to these schemes.

Property syndication investments were probably the biggest product rip-off in South Africa. The main target was pensioners seeking to get a slightly better ‘guaranteed’ return. Instead, they were burned, losing all or much of their capital and the income they received was paid from their own investments.

 

Pensioners can get a good deal

However, there are others who offer better returns, but do so honestly.

For example, Nedbank is now advertising two new products, paying slightly higher interest rates for people over the age of 55. The bank says it is ‘giving you the best in banking for this Seniors Month’.

The products are entirely different from property syndications. Sound products aimed at pensioners are a good thing. This is particularly for banks which use ageism to discriminately reject loans applications from people over the aged of 65.

The products are:

• Optimum Plus Investment Account: It offers an ‘effective’ interest rate from 7,4% up to 13% on a fixed deposit raging in term from one to 60-months. The five-year term currently offers the best interest rate

• Justinvest Notice Deposit: It currently offers a ‘promotional’ nominal rate of up to 9%, with access to your money with notice of 24 hours.

Both are advertised as providing free advice, effective interest rates and being risk free.

But pensioners need to check

You need to check this as the free advice you receive from a bank will not necessarily be on your overall financial needs, or whether you will not get a better return on a similar product elsewhere. What you need to check are the following issues:

• Effective rate: There are two rates of interest. The nominal rate: this is the actual rate you receive. The higher ‘effective’ rate is what you will receive in total if you do not withdraw any interest for the period of the investment. In other words interest will be paid on interest giving you the higher return.

• Ruling interest rates: The ‘repo’ rate, set by the South African Reserve Bank (SARB), now stands at 8,25%. In turn, banks charge you more than ‘repo” rate when they lend you money. Currently the prime interest rate (at which you borrow if you a very good customer) is 11,75%. The ‘repo’ rate is at a 14-year high. It is an open question whether the SARB will go higher in the future, stay the same or retreat. If the ‘repo’ rate starts to drop you are in the pound seats if you have a fixed interest rate as you will be ahead of new offerings from banks. If the repro rate increases, you will be losing out on the extra income offered on bank products.

• Indexes: The most import of these is the Alexander Forbes Short Term Fixed Interest Index (STeFI). The STeFI is a recognised benchmark of the returns earned in the South African money market. The money market consists of cash-like investments with a maturity of under one year based on a wide range of government, parastatal, corporate debt, securitised and money market assets. You should ask for the index when you invest. Currently it sits at 7,52% for one year  and 5,88% for five years underscoring how interest rates have gone up.

• Tax: You are likely to pay tax on interest earnings depending on your tax marginal rate and the initial rebate on interest earnings.

• Other banks: Much of this will depend on how much capital you invest, how long you leave it in the investment and any future changes applied by the banks. For example: African Bank, which previously went to the wall for offering higher interest rates, is offering an ‘effective’ fixed deposit rate of between 8,86% on three months and 10,4% on five years.

• Money market unit trust funds: Money market funds are not the same as an interest-earning bank account. What you must consider:

• A bank account guarantees you the quoted return. A money market account does not. The total return a money market investor receives is made up of interest received and ‘any gain or loss’ made on the underlying securities held by the fund. Money markets can very rarely suffer from capital losses. They can occur for investors, for example, when an underlying issuers defaults.

• There will be an advice fees of a money market funds, unless you go directly to the money market fund.

• There will also be other charges deducted by the provider, normally about 0,25 percent. An example: Allan Grey Asset Managers return over one year is 7,3% including their costs, but this does not include advice costs.

• Exchange Traded Funds (ETFs): The ETFs come in many forms. They are listed on both the JSE stock exchange and as collective investments. The ETFs also include money market trackers. An example: Sygnia currently offers 5,5% return over one year. (The next column will deal with ETFs in more detail. There is also a detailed description of ETFs in the book, The Ultimate Guide to Retirement in South Africa.)

• Your needs: You also need from yourself the replies to following questions. They include:

• Are you looking for a monthly income flow in the short-term;

• Do you just want to park the money for the short-term, say to go on holiday the next year; or

• Are you looking at a longer-term income flow. Then there are further comparisons you should make, such as investing in an income fund. Such a portfolio will provide the opportunity of a higher return based on more equities being included in the portfolio.

To answer these questions, you will probably need the advice of a good independent financial adviser. The best bet is a Certified Financial Planner (CFP) accredited by the Financial Planning Institute (FPI), who looks at your total investment portfolio. The website is www.fpi.co.za

There is a lot more detail on this in the book, The Ultimate Guide to Retirement in South Africa. For more information on how to purchase the book go to Buy Now on our website  www.retirementplanning.co.za

 

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