The retirement industry is currently facing a raft of reforms spearheaded by National Treasury and the Financial Services Board (FSB).
These include, among others, the Financial Services Laws General Amendment Act, bringing about 15 changes to the Pension Funds Act (PFA) and five other Acts administered by the FSB, the Treating Customers Fairly Bill, Regulation 28 and the Code for Responsible Investment in South Africa (CRISA).
While intended to protect the South African public from the many abuses they have suffered at the hands of the retirement fund industry, one cannot help but wonder who will pay for these reforms. Retirement funds will incur significant costs in terms of legal, actuarial, audit and operational fees to implement the legislation and regulations, adapt and redesign their systems, retrain staff and trustees and communicate changes to their members.
Consumers can rest assured that all these increased costs will eventually be passed on to them, as retirement funds are beholden to their shareholders, not to their members.
Costs are already a major challenge. In fact, National Treasury has noted that the South African retirement fund industry appears to be expensive, citing Treasury research that showed that if charges were reduced from 3.5 to 0.5 percent a year, pension fund contributors could receive double the benefits that are being accrued from their current contributions.
So how do investors protect their retirement savings when they already face high fees, and now, thanks to increasing regulation and reform in the retirement industry, possibly even higher fees?
Dr Koos du Toit, CEO of P3 Investment Group, says if you are saving up for retirement through a traditional pension or retirement fund, make sure you are paying no more than 1.5 percent in fees and, preferably, less than one percent. However, he says even this one percent can decimate your final pension amount by about 30 percent.
Despite this devastating effect of costs on their investment returns, most ordinary South African investors believe that investment fees are simply unavoidable. However, the reality is that there are simple, straightforward investments that do not require specialised advice or any adviser, investment manager or platform fees, and therefore produce impressive returns on investment. A case in point is buy-to-let property investment.
Dr du Toit notes that buy-to-let property investment is a simple, tried-and-tested way to build a financially independent retirement, without the fees that have decimated so many retirement plans. He says many investors are surprised to discover just how simple it is: acquire a well-chosen property, rent the property out to a reliable tenant, get a professional rental management company to manage the tenant and the property for a fee and then watch your investment grow into a passive income stream as the property produces an inflation-linked rental income month after month, while also producing capital growth year after year.
Of course, all investments entail risk. But what sets buy-to-let property apart from other investment options is the ability to manage, if not eliminate, the risks involved. Firstly, the significant risk of your retirement savings being decimated by fees is eliminated – there are no fees payable to anyone, neither initially nor ongoing. Other risks such as non-paying tenants or damage to the property are managed or eliminated through tried-and-tested risk management strategies that are simple and cost-effective to implement. In fact, buy-to-let property investment is a virtually risk-free investment if prudent risk management is applied.
Du Toit says far removed from the crippling fees, the jargon and the complexity of traditional investments, buy-to-let property investment is a simple, straightforward and proven way to ensure your capital grows and to secure an inflation-linked annuity income for retirement and beyond.
He says you do not need prior knowledge or qualifications, nor do you need much time or effort to implement this system. And, perhaps most importantly, you don’t need to sacrifice returns to pay advisers, investment managers or platform fees. “All that is required is the willingness to investigate the alternative of a direct investment in an income-producing property, used by the world’s wealthiest people and institutions – an alternative for all South African investors to investigate and implement, without the devastating impact of costs and fees.”