Seamless Retirement

Posted in Communication   |   March 17th, 2020

Is a seamless retirement possible?  

We have embraced the concept and are already assisting clients to follow this less complicated process at retirement.

In this article we will try to shed more light on the concept of seamless retirement.

Seamless retirement simply means that the employee puts the investment strategies and building blocks in place before retirement within the Retirement Fund (if permitted), which is converted to a product with the same asset allocation at retirement without paying high upfront fees for the conversion.

When members of a retirement fund approaches the age of 50, the life-staging concept, generally used by most funds, automatically provides for the Fund choices of the member to gradually change from high equity exposure to a lower equity exposure fund. Historically, equities have provided returns of inflation plus 7% compared to interest rate returns of inflation plus 1.5% over longer periods of time. The problem with this concept is the pensioner and his/her family have to reinvest the assets after retirement to provide for long term sustainable income and growth based on their life expectancy, which is generally achieved with a higher equity and a lower interest exposure due to the historic performance.

Seamless retirement simply means the member chooses the right allocation of assets in the fund pre-retirement to ensure his/her long term family objectives are met, taking his total portfolio into account, and not only the objective of the retirement Fund Trustees. At retirement, the member simply converts the retirement fund to a retirement product with the same or similar asset allocation.

Seamless retirement has various parts to it. The following summarises the concept;

• The employer approves flexible investment choice for people over the age of 55 within the Retirement Fund
• The employee signs a letter indemnifying the Trustee of liability for investment choices made
• The employee invests in a combination of assets to provide for cash withdrawals at retirement, sufficient income for the first five years after retirement and to invest in assets that will outperform inflation over the long term
• At retirement, the fund pays out the cash required, with the balance of funds transferred to a Compulsory Annuity at a minimal cost invested in the same asset classes as the chosen funds in the Retirement Fund

The benefits of a seamless retirement:

• The investment strategy is finalized whilst still employed
• All the changes at retirement are very stressful. Making investment choices during that period often leads to bad decisions which results in losses and standard of living deterioration
• Investment costs can be reduced. It is common in the market place to charge up to 3% upfront fees to implement a retirement plan. 
• Investments can be made to cater for the long term growing needs of the husband and wife, and planned according to their life expectancy and not only the retirement date
• Holistic investment planning, incorporating private assets and provision make planning for the post-retirement years more effective