Questions you should ask about your pension fund

Do you know where your retirement savings are invested? Are you sure you are putting away enough to sustain your standard of living in retirement? Angelique Ruzicka arms you with the right questions to ask your advisor to avoid any future unpleasant surprises.

Investing in a pension fund is one of the most important things you can do to secure your future financial well-being when you retire. But it’s crucial that you don’t stick your head in the sand and forget about your retirement savings. To ensure you know what your financial future holds you should ask your financial advisor the following questions:

1. Will I be financially comfortable in retirement?

Don’t just accept a simple ‘Don’t worry, you will be fine’ answer from your financial planner. It’s important that you have a very realistic picture of your retirement prospects. Will your retirement income allow you to live the kind of life you are living now? Can you go on holidays regularly or will you have to cut back on luxuries? Take a look at our guide on how to sort out your finances for tips on where to start.

2. Am I setting aside enough for my retirement?

The rule of thumb is that up to age 40 you should be setting aside 15% of your monthly gross income. If you are only starting to conduct your retirement planning after 40 then you should be setting aside even more, around 20%.

3. Are you including my employer pension fund in this calculation?

Some financial planners may not have taken your pension fund with your employer into account. Ask your advisor how your company pension fund will impact on the other investments they have recommended for your retirement.

4. Is my money accessible?

If the money isn’t accessible then it’s not necessarily a bad thing because ideally pension savings should not be touched until you retire. But what if you need money urgently for your child’s university fees or a new car? One of the few disadvantages of saving through a retirement annuity, for example, is that you can only access the money at the age of 55. However, not all retirement fund vehicles prevent you from accessing your money. It’s important though to find out now if you can access the money in the event of an emergency, rather than regret your investment decision later.

5. Are you tied to promoting certain products?

Find out if your advisor is obligated to sell products from a particular company. There are some excellent financial advisors that are not independent, but it is important that you know whether they are constrained. “It doesn’t mean that they are a bad financial planner but you need to understand that the products being presented to you are from a narrower set of solutions,” said Gavin Came, consultant at Sasfin and chairman of the financial planning committee at the Financial Intermediaries Association of Southern Africa.
Take a look at our guide on the ten financial products you can’t live without for more tips on which products are relevant and useful.

6. Am I locked into paying toward my retirement plan?

Find out what the consequences are if you stop making payments to your chosen retirement vehicle. Some retirement annuities (RAs) and endowments are voluntary and you can stop making payments at any time. However, some RAs have a contractual savings element where you are obligated to pay up to age 55 or 60. Depending on where you’ve put your money, there are different financial consequences for stopping payments early. “Termination fees, by law, are not allowed to be higher than 15% of the accumulated value of the fund. So if you’ve been putting away R2,000 for a year, which comes to R24,000, they could charge up to 15% of that R24,000 as a fee for early termination,” explained Came.

7. Where is my money being invested?

Your money could be put into in a host of different investments from money market funds to bonds to stocks and shares. Some will provide you with more volatility (meaning your investments can go up and down). If you are not set to retire for a number of years then you should give your pension savings a better chance of growth by exposing the money to more volatility. “If you invest in the stockmarket you will get the best returns over long periods of time but the performance could be quite volatile over the short term. Over the longer period the equity market is likely to give you the best return above inflation,” explained Came. For more insight into investments, take a look at our simple investment guide.

8. At what rate have you projected my financial planning?

Finally, ask your adviser what assumptions they have taken into account in planning for your retirement. Inflation and interest rates have a role to play in calculating what you get after you retire. Remember that projections are estimates so you have to find out from your advisor if they are being realistic with their calculations. Is the fund likely to perform at the rate of return the advisor has calculated? “The higher the rate of return the less reliable the results could be because the investments may be linked to more volatile funds,” said Came.

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