As a consequence of the lockdown in response to the Covid-19 pandemic, many South Africans are suffering a reduction of income, some are losing their jobs altogether. This will impact their lives in a variety of ways, notes Brett Mackay, Investment Consultant at 10X Investments.
Worries about paying the rent or home loan instalments, covering their food bills, keeping insurance premiums up-to-date, and deciding whether or not to continue with contributions to savings plans will be weighing heavily on consumers’ minds.
For those who can keep their savings going, it is a great time to invest, said Mackay.
“The world’s markets have lost significant value meaning that shares are a great deal cheaper than before. The amount one invests now will buy a lot more units than when markets were stronger, and the value of those units will grow as the markets recover.
“Still, at times like this, many are just not in a position to continue with their existing investments. They may want to make a policy paid up, ie stop contributing to it, or perhaps move to another provider that gives better value in terms of fees charged and/or returns earned,” he said.
One factor to bear in mind in either case, according to Mackay, is that some investment providers levy a penalty charge should one decide to stop contributing or move your savings to another provider.
If the value of one’s retirement savings pot has already taken a knock in the recent Covid-10-induced turmoil in the markets, you might think that incurring a penalty (ie sacrificing more money) to move to another fund makes no sense.
But, very often taking a hit upfront will be very well compensated for over the remaining term of your investment, Mackay said.
There are two points to consider, said Mackay:
Paying high fees, especially for less-than-fantastic returns, over the life of your investment often does more damage than a once-off hit. The bottom line is that you could end up with more money even if you surrendered a chunk to transfer to a low-cost provider.
You will probably pay the value of the termination charge over the lifespan of your investment even if you don’t move your savings to where you want them to be.
“Termination charge” and “termination penalty” are phrases used by the life insurance industry to create the impression that clients are being punished for breaking a contractual agreement. The assumption is that this penalty could be avoided by staying put.
“Whether or not this is true (and it isn’t always), you should have the freedom to move your own funds if you are not happy with your current provider,” said Mackay.
The goal of the penalty is to deter you from switching. It is important to understand that it covers what are essentially ‘sunk costs’ – such as sales commissions and the costs incurred by the company to process new business.
In other words, these are costs you have already incurred and will have to pay one way or another. These costs are either recovered from your investment over the years, or via a termination/penalty fee.
Mackay cautions that moving your savings to another provider is not a decision to be entered into lightly. “Keeping costs down is only part of the formula for retirement savings success: investment returns, and the overall client experience are important too.”