There are winners and losers in just about every situation, and seldom more so where interest rates are involved.
But the worst thing about interest rates is that those who manage their finances carefully are too often punished, while those who are lax are often rewarded.
According to calculations done by First National Bank, someone who was paying R5 000 a month on his or her home loan 30 months ago now need pay R1 617 less.
But if you are wise you will not have reduced your repayments, because you will now be saving thousands of rands in total interest and will knock years off your repay-ment period.
But FNB also calculated that someone earning an interest income of R5 000 a month from a money market account 30 months ago is now receiving R3 134 - a loss of R1 866 or a drop in income of almost 40 percent.
As a consequence, the situation for many pensioners is now dire.
It has led Shantha Padayachee, the president of the Institute of Retirement Funds, to call for a special dispensation for pensioners.
She points out that interest rates are at their lowest levels in more than 10 years.
She says the low interest rates are necessary against the backdrop of the bigger economic picture, the strength of the rand and the need for a stimulus to create investment and employment .
But, she says, the interests of our senior citizens have not been taken into account and there is a danger that they are being sacrificed on the altar of expediency.
The problem for pensioners is that most cannot find another source of income. They must simply cut their (for most) already low standards of living. Bear in mind that fewer than one in 10 people retire financially secure. The other 90 percent-plus are in various stages of financial distress from the day they retire.
Special benefits
Padayachee would like to see a new basket of aggressive special benefits and other income-enhancing benefits for pensioners to ensure that not even more of them become reliant on the monthly social old-age grant of R1 080.
She says that the country already has more people reliant on social grants than there are taxpayers.
Padayachee says the proper treatment of retirees is not only the task of the government but also the private sector. She says the private sector needs to re-examine its business practices and ethics to ensure that a greater percentage of retirement monies actually accrue to retirees.
She argues, among other things, that banks already grant lower bank charges to people over the age of 55, so why not also pay them a higher rate of interest?
Another example would be to force the private sector to allow pensioners using investment-linked living annuities (illas) to invest a portion of their capital in RSA Retail Bonds, which pay a higher rate of interest than banks and other interest-generating investments.
Here are a few more things for the list:
- Stop the financial services industry ripping off retirement savings through ridiculously high costs and the mis-selling of products. This happens both in the build-up to retirement, for example with life assurance retirement annuities; and during retirement, for example in the cost structures of linked investment services providers (Lisps).
No one has yet offered a plausible explanation as to why Lisps charge about two percent of the assets invested in illas for what is a pure administration service. This particularly when, combined with the costs of the underlying investments, the total costs can be greater than the actual pension being withdrawn by an illa pensioner.
- The government should proceed at haste with the reform of the formal retirement sector. The industry has proved time and again that it will not clean itself up voluntarily.
The retirement section of the Financial Services Board (FSB) needs a major overhaul. It is simply not doing enough to protect the savings of individuals. An example is the farcical way the FSB continues to allow employers to steal the retirement contributions of fund members.
The Aurora mines fiasco, where contributions were not paid to the retirement fund, shows that the FSB simply does not have the guts or the capacity to stop this on-going racket.
Granted, the government has done much to improve the lot of retirement fund members and pensioners over the years - from introducing the RSA Retail Bonds to making the private banking sector more competitive, to improving retirement fund governance.
But Padayachee is right. Much more needs to be done.
Personal responsibility
However, every individual also needs to take a lot more responsibility for his or her own financial fate. This means taking time to learn about finances and ensuring that they receive proper financial advice.
Take Graph 2 as an example. It shows how someone who invested their money in an income-generating unit trust fund (Marriott High Income Fund of Funds) has not been hit as hard as someone who invested in a money market fund for an income.
Simon Pearse, the chief executive of Marriott - one of the Old Mutual boutique asset managers - says the Marriott High Income Fund of Funds is structured to produce a high and relatively consistent income yield combined with the protection of capital over the long term. The secondary consideration is to build the capital value.
To achieve these targets, income funds include assets such as property, which provides rental income (which does not fluctuate as widely as interest rates); bonds, where you can receive both capital growth and interest; and listed companies that provide a high dividend stream.
Pearse says income produced by interest-earning vehicles such as fixed-interest bonds and listed property would not have been affected by the drop in interest rates, but you are exposed to a higher level of capital risk.
If you can withstand possible capital volatility, then investing into a fund designed to produce a reliable income stream using these asset classes may be prudent.
Pearse says if you are currently invested in money market instruments and want to stay there, you will, unfortunately, have no option but to reduce the income you draw to avoid capital erosion.
If you are currently looking for a relatively stable income stream, you should consider investing in a managed income fund that blends asset classes with the objective of providing reliable income and at the same time minimising capital volatility, Pearse says.
One thing you should be very careful about is investing in a guaranteed annuity (bought with discretionary money or with the proceeds of tax-incentivised retirement savings). You will be locking in the current low interest rates for duration of the annuity.