Most people need financial advice for retirement planning, but it is no good seeking this advice for the first time the day you retire, says Bruce Cameron, the editor of Personal Finance and author of the book Retire Right. Cameron was a speaker at the recent First National Bank/Personal Finance Successful Retirement seminars.
If you leave your retirement planning until the day you retire, you leave yourself exposed to being given inappropriate advice and having to live in destitution in retirement, Bruce Cameron warned when speaking on the subject of "Getting the best financial advice".
Cameron says most people need financial advice for numerous reasons. These reasons include:
- Products. There is a wide and complex range of retirement funds and products which are designed to meet many different needs, both in the build up to retirement and in retirement.
- Investment. Increasingly you are being given more and more investment choice with your retirement savings which requires expert help, particularly against the background of volatile investment markets.
- Taxation. Your retirement savings are affected in many different ways by taxation, which can have a major impact on how much money you have in retirement.
- Estate planning. You need to plan properly for the disposal of your retirement savings, not only in retirement but also from the day you make your first contribution to a retirement savings vehicle, particularly if you have dependants.
- Time and expertise. Most people do not have the time or expertise to look after their retirement savings.
Cameron says that retirement planning is not something that is done on the day you retire. You need to plan and get advice from the day you start to earn an income to the day you die. Retirement planning can be divided into four stages, namely:
1. The build-up stage
When you are saving for retirement, you need to know what amount you are targeting. Cameron says the old rule of thumb, namely that you need capital equal to 10 times your required annual income at retirement, no longer holds and will not provide you with an adequate pension.
You need to set proper targets taking account of your personal financial circumstances and the lifestyle you require at retirement.
Cameron says you need to beware of a number of danger areas in the build-up phase. These are:
- The retirement gap. No employer-sponsored scheme is sufficient to meet your retirement needs. Most schemes aim at providing you with between 70 and 75 percent of your final pensionable salary (excluding all fringe benefits) after you have been a member of a fund for 40 years.
- Inflation. Your retirement savings can be ravaged by inflation, particularly if the inflation rate is greater than the returns you receive on your savings.
- Investment choices. The wrong investment choices, particularly in the early years, can have a devastating affect on your savings.
- Not preserving retirement savings. If you spend your retirement savings each time you change jobs, you will not have enough money at retirement.
- Leaving it too late. If you do not start saving early in your working life, you simply will not have enough money when you retire.
2. The last lap: The last 5 years
In the five years leading up to your retirement, you not only have to continue building your wealth but also preserving what you have saved, ensuring that volatile investment markets to do tear your savings apart. Issues to consider include:
- Switching savings from market-linked investments into vehicles that protect your capital and still provide investment growth.
- Switching from a defined benefit fund to a defined contribution fund, particularly if your employer-sponsored fund is in surplus, in which case you will get part of the surplus. A switch may also provide you with greater annuity (pension) choices.
- Fine tuning your retirement plans. This includes setting your retirement date and maturing your retirement annuities.
- Learning about the pension options you have on retirement day, including the types of annuities (pensions) available to you.
3. At Retirement: Buying the right annuity
Cameron says there are various annuity choices, and you will need appropriate guidance to ensure you make the correct choice. Taxation is also complex at this stage.
4. In Retirement: Making it last
You have to be sure that your pension will be adequate until the day you (and your partner) die. Your biggest enemy is inflation and you will probably find you will need to continue saving part of your income to ensure you can counter inflation.
How to choose an adviser
Cameron says selecting a financial adviser is not about choosing the first person who tries to sell you a life policy. "The person you select has to be someone with whom you are going to have a long-term relationship and who will have an intimate knowledge of your financial affairs."
One of the big problems in the past is that anyone could become a financial adviser, whether they were qualified or not and even if they had a track record of dishonesty.
This will change from October 1 this year, when the Financial Advisory and Intermediary Services (FAIS) Act comes into full effect.
In terms of FAIS, all financial service providers who give advice or sell products will have to be registered and meet fit and proper standards, which means they must have minimum qualifications and cannot be fraudsters or be bankrupt.
In terms of FAIS, your adviser will have to give you appropriate advice; keep proper records of the advice given to you; give you certain information about him/herself; and tell you what products he or she is licensed to sell. If your adviser fails to comply with these terms, you will have the right to complain to an Ombud, and if you have been given bad advice, you can be compensated.
Cameron says you still need to be informed about financial advisers, such as knowing the difference between an agent, a general agent and an independent adviser.
Agents are full-time employees of companies and can only sell the products of that company. The company accepts responsibility for advice you receive from its agents.
General agents are similar to agents but they can also sell the products of competing companies approved by the employer. The employing company accepts responsibility for advice given by its agents.
Independent Financial Advisers (IFAs) can sell all financial products, but companies will not take responsibility for advice given to you by IFAs.
IFAs come in many different guises from a one-person operation through to a nationwide broker company (such as a bank brokerage), or they can belong to a network structure which provides independent advisers with back-up services, such as assistance with making investments.
Cameron says given the increasing complexity of financial planning, it is best to use a broker company or someone who belongs to a network, because more skills are available to you.
However, you must take qualifications into account. The FAIS qualifications are minimum qualifications. The top qualification in the industry is that of a Certified Financial Adviser (CFP) accredited by the Financial Planning Institute.
Remember that most financial advisers do not have full investment discretion nor the skills to advise you on investments. In order to have full discretion to make investments on your behalf, an adviser must be registered with the Financial Services Board as an investment manager. Again, there are minimum qualification levels. The best qualified advisers will be those who are Certified Financial Analysts.
What to expect from your adviser
Your adviser should thoroughly assess your financial situation using a financial needs analysis computer program that takes account of your current financial position and your financial goals. Among other things, a financial needs analysis will help you identify how much money you need for retirement; the needs of your dependants if you are no longer able to provide for them; assess what risks you can take and what risk you need to share by taking out life assurance); how you should structure your medium to long-term financial plans; give you an idea of the products you require; and what you can afford.
Your adviser should NOT encourage you to: invest in unregistered financial products, particularly unlisted companies; make high-risk investments, particularly with your retirement savings; borrow to invest; or continually switch between financial products.
15 questions to ask your adviser
1.Are you an agent, general agent or an independent adviser?
2.Are you registered under FAIS?
3.Are you a member of an industry association?
4.What are your qualifications?
5.What do you do to keep yourself informed?
6.What experience do you have?
7.What skills do you have?
8.What back-up resources or services do you offer?
9.Do you have indemnity insurance?
10.With which product providers do you have contracts?
11.Do you have a succession plan in place?
12.What services will you provide?
13.How do you manage conflicts of interest (for example, do you accept other inducements such as overseas trips)?
14.How often will I see you?
15.What do you charge? It is important that you understand how much you will be paying. Cameron says it is best to pay an annual fee, against which any commissions or fees are deducted. This way the adviser will not be enticed to sell you products you do not need in order for him or her to make a living. You need to understand that different companies pay differently with both up-front and annual commissions/fees and other incentives, including luxurious trips abroad, which could act as a perverse incentive to mis-sell products to you.