Investment choices of a Retirement Annuity
Consumers are being offered more and more
investment portfolios. The choice can range from a simple managed portfolio with capital guarantees, invested across asset classes and in which you have no say in the investments, to a "fruit salad" of unit trust funds which you must select.
However, due to the volatility of investment markets in recent years, financial services companies have put together numerous investment portfolios that are aimed at minimizing risk and beating inflation.
These portfolios come with various levels of risk. Most of these offerings also come with simple calculators to assess your risk profile. These risk profile calculators can be very misleading. Often they are based more on your psychological approach to risk than your actual financial ability to withstand investment risk. Consequently, people who are psychologically prepared to take high investment risks can land up without sufficient money on which to retire.
There are regulations, issued under the Pension Funds Act, which attempt to limit investment choice and therefore limit the risk to individual investors. These regulations are called the Prudential Investment Regulations (PIRs), and they restrict how much can be invested in the various asset classes, offshore and in specific sectors of the market and/or companies.
For example, no more than 75 percent of your money is allowed to be invested in shares and no more than 15 percent may be invested offshore.
The problem with these guidelines, however, is that they only apply at fund level and not to individuals. While some RA funds insist on applying the PIRs at fund and at individual level, others do not.
In other words, as a member of a
Retirement Annuities (RA) fund, you may be able to choose an extremely high-risk portfolio, and invest 100 percent of your money offshore or 100 percent in shares.
As well as having a greater choice of investment portfolios/underlying investments, you are also free to switch between investment offerings at any time.
Before you opt for an RA that gives you a wide range of choices, you should consider the following factors:
- Cost. The greater the choice, the more it is likely to cost you, particularly if you switch between options on a regular basis.
- Expertise. Many people have lost huge amounts of money by continually switching into the investment flavour of the month, often because of poor financial advice. The switch often occurs when the sector is booming and they buy in at the top (remember the information technology bubble?). Then, when the sector collapses, investors sell out, only to jump into the next hot stock or sector.
On the other extreme, some investors opt for the most conservative portfolio, which reduces potential returns and the possibility of having a financially secure retirement.
There are a number of issues you should consider when making investment decisions. These include:
- Retirement saving is a long-term affair. Markets will fluctuate, but the trend historically has been up. Historically, shares have out-performed bonds and cash over the long term.
- You should be neither too aggressive nor too conservative. You should rather select a properly diversified, balanced portfolio in line with the PIRs. Obviously, the further you are from retirement, the more money you can - and should - invest in an aggressive portfolio.
Costs. You are often charged higher costs if you opt for products that offer you a great deal of choice.
To learn more about the top ten things to know before buying retirement annuities