U n d e r s t a n d i n g. a t r e t i r e m e n t. your pension options MEMBER NEWSLETTER JULY. Update from the Principal Officer

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Cameron Hudson
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In this edition we discuss the different types of pensions available in the market, as well as the factors that affect the monthly pension amount.

We remind you to have a look at the investment performance for Q2 2015 as well as the Investment Managers views for the remainder of the year.

1 MEMBER NEWSLETTER JULY Update from the Principal Officer Dear Members In the previous edition of The NestEgg we ended off briefly discussing retirement planning considerations you need to be aware of, in order to select the most suitable pension or annuity to cater for your personal needs. In this edition we discuss the different types of pensions available in the market, as well as the factors that affect the monthly pension amount. We also compare the characteristics and benefits of the different types of pensions, as well as the risks linked to these pensions. We remind you to have a look at the investment performance for Q as well as the Investment Managers views for the remainder of the year. Regrettably, Advocate Fran du Plessis, the Chairperson of the Board of Trustees, has resigned from the Board due to personal time constraints. Dr George Coetzee has taken up the role of Chairperson until a new Chairperson is formally elected by the Board. Fund regards Lynn van der Merwe What are the risks linked to annuities? PAGE 1 U n d e r s t a n d i n g your pension options a t r e t i r e m e n t Upon reaching retirement you are faced with a number of decisions you will need to make. As a pension fund member you may only take up to one-third of your fund credit as a cash payment (except if your fund credit is below R75 000, when you can take all of it in cash) and you will have to buy an annuity (pension) with the remaining two-thirds. So where do you start? Faced with so many different annuity (pension) options to choose from, can be rather scary. However, it becomes easier if you understand the options available to you, the factors affecting the size of a monthly pension, as well as the differences between the types of annuities. Another important aspect is to understand is the associated risks of the different annuities. The main risks in relation to the different types of annuities available to retiring members are as follows: Longevity risk the possibility that you live longer than your money lasts; Investment risk the possibility of achieving lower investment returns than the levels required to provide you with your required pension income; and Inflation risk the possibility that your pension income may not keep pace with your living expenses.

2 What are the different types of annuities? Annuities can be split into two categories, each with a number of options. These two categories are called: Guaranteed or life annuities; and Investment-linked living annuities (ILLAs). Guaranteed or life annuities A guaranteed or life annuity is basically an insurance policy orcontract t between you, the member, and an insurance company. A capital amount of at least two-thirds of your fund credit is paid over by the Fund to an insurance company of your choice, in return for a monthly income (based on certain agreed conditions) that is guaranteed to be paid to you until death. These conditions are agreed upon at the start and can t be changed at a later stage. The longevity and investment risks, as explained above, are passed on to the insurance company and the pension will be paid for as long as the pensioner lives. However, this guarantee will come at a cost, as do all guarantees. The cost of additional security relating to future increases, for example, will affect the monthly pension amount payable to you. Some of the types of guaranteed or life annuities are: Level guaranteed life annuity the monthly income is set for life and will never increase. Escalating guaranteed life annuity the pension payments will increase at a fixed rate per year. With-profit life annuity the pension will increase annually depending on the investment returns earned on the investment portfolios in which it is invested and the initial purchase rate. Inflation-linked life annuity the pension will increase in line with inflation on an annual basis. These may be structured as single-life annuities, which means that only the pensioner is insured or provided for. However, a number of extra conditions may be added, such as providing for a spouse s pension upon the death of the pensioner so that the remaining (widowed) spouse will have a pension for life. This is called a joint-life annuity. DID YOU KNOW? R1 million invested to purchase a single-life annuity (no spouse s pension in the event of the pensioner s death) with annual inflation-linked increases and no guaranteed period will provide: a 60-year-old male with a starting pension of R per month; and a 60-year-old female with a starting pension of R per month. Women receive a lower starting pension as they have a longer life expectancy. As always, you are advised to consult an accredited financial adviser, who will assist you through the process. Your adviser will obtain annuity (pension) quotations from various insurers and advise how much you can expect to receive as a monthly pension, according to the various insurers quotations. The monthly pension amount will depend on the capital amount available, as well as a number of other factors. PAGE 2

3 So what are the main factors that determine the monthly pension amount of a guaranteed/life annuity? In the table below we take a look at the main factors and how they affect the size of your monthly pension amount: Your capital amount Your gender Your age The guaranteed period you want The future increase you want Your spouse s pension Interest rate movements This is the portion of your fund credit that is used to buy the pension. As a pension fund member you have to use at least two-thirds of your fund credit. The bigger the capital amount, the bigger the starting monthly pension. Research shows that females are likely to live longer than males and therefore their pension has to last longer than that of a male. Therefore, the starting monthly pension income of a female will often be less than the monthly pension income of a male, which is expected to be paid for a shorter period. Determines your life expectancy i.e. how long you are expected to live. The older you are when you buy your pension, the bigger your starting monthly pension will be. How many years you want your pension to be guaranteed to be paid for. If your guaranteed period is 10 years and you pass away 5 years after you retire, your monthly pension will be paid to a beneficiary of your choice for the next 5 years. Examples of guarantee periods are 5, 10, 15 or 20 years. The longer the guaranteed period you choose, the smaller your monthly pension will be. Whether you require annual pension income increases, and the level of these future increases. If you do not select a future (inflationary) increase your pension amount may not keep pace with your living expenses and may become a problem as the purchasing power of your pension will reduce year by year which means you will be able to buy less with your monthly pension. However, the bigger the future increase you choose, the smaller your starting monthly pension will be. Whether you require a pension to be paid to your spouse if you pass away before your spouse, and whether your spouse s pension should be equal to your pension or a portion (percentage) of your pension. This will also affect the starting pension amount. A spouse s pension is usually equal to 50% of your pension at the time of your death. Some options are sensitive to interest rate movements and can vary by approximately 4% for every 1% move in interest rates. DID YOU KNOW? R1 million invested to purchase a joint-life annuity (including a spouse s pension of 50% of the pension on the pensioner s death) with annual inflation-linked increases and no guaranteed period will provide: a 60-year-old male with a starting pension of R per month; and a 60-year-old female with a starting pension of R per month. Investment-linked living annuities (ILLAs) An investment-linked living annuity or ILLA is basically an investment product in which the income is not guaranteed. Pension payments are dependent on the performance of the underlying investments the pensioner is invested in. However, if managed well these annuities can provide a higher level of income during your retirement. The pensioner draws down an agreed amount from the investment each month by taking a small percentage of the investment as a monthly pension. Currently, the law allows a pensioner to choose an income that ranges between 2.5% and 17.5% of the capital invested, which can be changed once a year. A living annuity therefore allows for greater flexibility of income. The longevity and investment risks will remain with you, the member and all investment returns from the capital you invested will be allocated to you. There is however a danger of running out of money if you draw down too much, too soon. However, should you pass away, all of the remaining capital will be payable to your beneficiaries. PAGE 3

4 So what are the differences between the various types of annuities? The table below shows the most common annuity (pension) options used by retirement fund members: Escalating guaranteed life annuity / pension With-profit annuity / pension Living annuity / pension Characteristics At retirement the member decides on a rate of increase (the higher the rate of increase, the lower the starting pension). When the pension is purchased, the member has a choice regarding a minimum guarantee period and a spouse's pension option. The pension is purchased at a fixed rate and will increase by investment returns declared minus the purchase rate. The higher the purchase rate, the higher the starting pension but the lower the future increases. When the pension is purchased, the member has a choice regarding a minimum guarantee period and a spouse's pension option. The pensioner obtains an investment account and chooses the portfolio(s) in which the retirement capital will be invested. The amount of the monthly pension is chosen by the pensioner and must be between 2.5% and 17.5% of the capital amount. The rate selected by the pensioner may be changed once a year based on the capital amount at year-end. A pensioner may nominate a person (e.g. his/her spouse) to receive the balance of the capital either as a cash lump sum or as a monthly pension (depending on the remaining capital amount). Risks Future rate of inflation is unknown. A member may, for example, choose an annual pension increase of 5% and inflation rises to 10%. Low interest rates at retirement will mean that monthly pensions cost more than when interest rates are high. The member chooses options at retirement which cannot be changed, thus the pension is not flexible. In times of poor investment performance pension increases may be low or no increases may be granted. The pensioner carries the full investment risk. Investment decisions are important and unstable investment markets may cause the pension to drop. If the pensioner withdraws a pension at a higher rate than the investment return earned on the capital then the capital will decrease. The pension will then most likely also decrease or stop sooner than expected. Benefits The pensioner has certainty about future pension payments, i.e. the annual increase as well as what happens in the event of death etc. is agreed upon upfront. Since the pension increases are linked to the investment returns declared (minus the purchase rate) the pension may, to some extent, keep up with inflation. The pension will never decrease. A pensioner who is backed by good investment advice is able to keep control of the investment decisions regarding the retirement capital, thus allowing for more flexible annual pensions. The pensioner decides on the level of annual pension increases within the guidelines laid down by the authorities. There is no one-size-fits-all annuity (pension) type that will work for every situation and for every pensioner. The ideal pension will depend on the size of your fund credit, your individual needs, as well as the current economic climate. It is very important that members should choose a retirement product that makes the best provision for their own personal needs. This should be done in consultation with an accredited financial adviser. PAGE 4

5 EASY TIPS on how to build for retirement You may have wondered at what age you need to start saving for retirement. The simple truth is that the moment you start earning money, you should think about saving for the future. You want to save at least twelve times your salary before you retire. This might be more or less depending on when you plan to retire. The earlier you start, the less money you ll need to contribute, thanks to the power of compound interest. Unfortunately though, saving is one of those things we rarely think about until it s too late. Knowing what you re meant to do, and actually doing it, are two very different things. The results of the 2015 Sanlam Benchmark survey revealed the following alarming statistics about South Africans: 72% 55% 25% 63% 54% 61% of retirement fund members never revise their original investment decisions. have never sought advice from a certified financial planner. chose to withdraw their savings after resigning or being retrenched (4% more than in 2014). of those that withdrew their savings did not understand the tax implications. of members who withdrew a portion or all of their savings in cash regretted the decision, even if the money was used for a worthwhile cause (e.g. to reduce debt). did not realise the long-term effects of withdrawal. Added to this, many of us are facing a situation in which we may have to support our own retired parents, while also providing for our children, and trying to reduce our spending, all at the same time. PAGE 5 SO, WHAT S THE SIMPLEST WAY TO START SAVING? Acknowledgements : SEB : RFA Communications and insite Innovative Education Solutions (2015)

6 1 Have a plan A written plan helps you to focus on concrete goals, so speak to a financial advisor to help you create a plan that is perfect for your needs. You need short-term and long-term savings. SHORT T E R M (money for unexpected expenses, appliances that break, medical expenses) LONG T E R M (retirement savings) 2 Pay yourself first Paying yourself first is the most important habit you can develop. So spend what is left after saving, and not the other way round. 3 Don t go for lifestyle over savings You should never live to the full capacity of your income or worse, create debt to improve your lifestyle. You need to have available capital for your investment activities. 6 5 Make the commitment Go automatic Arrange your finances so that every month certain actions take place that automatically grow your assets without any decisions or extra effort on your part. Such as creating a debit order to a savings account or increasing your contributions to your retirement fund. Successful retirement planning requires you to provide the necessary resources to reach the goal. Don t set yourself up for failure by under-committing or committing too little, too late and expecting miraculous returns Don t procrastinate If you wait just six years to get started and your assets grow at 12% annually, you will have half as much money when you retire compared to starting today. So start today. Don t touch! A pile of savings that is easy and pain-free to reach is an easy solution to life s troubles. And that s a bad thing. The rule is simple: when you build a nest egg, don t touch it for any reason whatsoever. Just let it grow and grow until you are financially free. 8 PAGE 6 And finally: NEVER GIVE UP You might not have known all of this when you were younger. You might be 50 years old and have not saved anything or have saved very little. Remember: it is never too late to start. Every little bit helps. No matter where you are on your journey, don t put off this important action. Save, save, save. As much as you can. Whatever you can. MY 4 STEP SAVINGS PLAN What I need to do Make an appointment with an accredited financial advisor. (Contact your bank, insurance company or for contact details.) Create my budget to see where I can save. Every little bit helps. (Start off with just R50 if that is all that you have!) Set up an automatic debit order to a savings account (short-term savings), and/or contribute more to my current retirement fund (long-term savings). (You need both short and long-term savings.) Don t touch my savings when I leave my employer. (If you take your retirement savings in cash before retirement you will have to start saving from scratch.) YOUR FUTURE IS CREATED BY WHAT YOU DO TODAY. Acknowledgements : SEB : RFA Communications and insite Innovative Education Solutions (2015)

INVESTMENT PERFORMANCE REPORT QUARTER 2 OF 2015 Market Overview The underperformance of commodities and fixed-income asset classes during Q2 2015 has increased the likelihood of a US rate hike later

Although there have been signs of economic growth in the Eurozone, suggesting that the European Central Bank s quantitative easing is having the desired effect, Greece has been the centre of

7 INVESTMENT PERFORMANCE REPORT QUARTER 2 OF 2015 Market Overview The underperformance of commodities and fixed-income asset classes during Q has increased the likelihood of a US rate hike later in This in turn caused the US dollar to strengthen, with negative implications for commodity prices. Although there have been signs of economic growth in the Eurozone, suggesting that the European Central Bank s quantitative easing is having the desired effect, Greece has been the centre of attention in recent weeks after failing to make its debt repayment to the International Monetary Fund (IMF). Following a referendum to decide whether or not to accept the conditions of the proposed bailout, the result was a resounding no, which meant more negotiations would be required before Greece s next debt repayment to the European Central Bank is due in late July Stability remains the basis of Chinese policy and once again interest rates were cut in June 2015 to try and support the slowing economy. As a result of the uncertainty around Greece and interest rate increases in the US emerging markets remain vulnerable to capital outflows, even though valuations are still fair relative to developed markets. In South Africa, energy supply constraints, limited fiscal room to move and weak demand have constrained South Africa to a low growth path, with politically challenging decisions to make. This has made it difficult for corporates to justify new investments, which may hamper growth and could also have longer-term negative effects. The South African Reserve Bank (SARB) has slashed short-term economic growth potential to between 2.0% and 2.5%, warning that problems in the electricity sector are curbing growth prospects. PORTFOLIO / INDEX Performance summary as at 30 June 2015 QUARTER 1 YEAR 3 YEARS Sources: Momentum and Investment Solutions 5 YEARS DEC 2000 Growth 0.10% 8.93% 16.96% 14.87% 15.16% Click on the links below to access the following additional information: Investment Managers Outlook and Strategy Update Website Investment Page Balanced 0.07% 8.81% 14.09% 12.87% 12.37% Stable 0.27% 7.60% 10.19% 9.85% 9.23% Money market 1.65% 6.55% 5.81% 5.89% 7.56% CPI 1.46% 4.60% 5.58% 5.45% 5.80% Historical performance of the fund 800% 700% 600% 500% 400% 300% Growth Balanced Stable Money Market CPI 200% 100% 0% Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 PAGE 7

8 Asset allocation per portfolio Local Shares Local Bonds Local Property Local Cash International 23% 10% 18% 15% 5% 50% 9% 5% 43% 35% 100% 22% 25% 40% Growth Balanced Stable Money Market Top ten domestic shareholdings 1 British American Tobacco PLC 33% % 2 Sasol Limited 6.65% 7 Old Mutual PLC 3.36% 3 Standard Bank Group Limited 5.91% 8 CF Richemont SA 3.08% % 9 Remgro 2.99% % 10 2% Manager performance (Gross returns) as at 30 June 201 ASSET CLASS Shares (Equities) MANAGER Allan Gray Corona ti on Foord DATE APPOINTED 01-Oct Feb Jul -13 QUARTER -0.27% FTSE/JSE Free Float Index (ALSI) -0.20% 4.79% 18.95% 18.04% 1.18% 0.06% 1 YEAR 3.65% 6.68% 9.71% 3 YEARS 17.75% 23.01% 5 YEARS 17.11% 21.32% SINCE INCEPTION 22.32% 15.31% 21.54% 17.41% Bonds Old Mutual Corona ti on 01-Dec Aug % -0.67% 7.79% 8.19% 7.42% 8.33% 9.92% 11.35% 9.87% BEASSA All Bond Index (ALBI) -1.40% 8.21% 6.64% 9.10% 10.75% Property Ses fikile 01-Aug % 29.63% FTSE/JSE SA Listed Property Index (SAPY) -6.23% 26.98% 18.61% 20.49% 22.66% Cash Inves tec Sa nl a m 01-Dec Dec % 1.74% 6.74% 6.88% 6.11% 6.21% 6.20% 6.27% 8.70% 8.61% STeFI Composite Index 1.56% 6.27% 5.66% 5.77% 8.21% Allan Gray 01-Oct % 6.54% 23.33% 16.40% 9. 7% International Inves tec 01-Feb % 14.47% 25.36% 18.52% 10.33% Foord 01-Jul % 14.86% 17.00% Morgan Stanley Capital International All Country World Share Index (MSCI) 0.67% 16.34% 31.06% 24.67% 8.35% FUND CONTACT DETAILS Tel Fax retfund@media24.com Website PAGE 8

What you need to know about obtaining personal financial advice. Update from the Principal Officer. MEMBER NEWSLETTER October 2014

What you need to know about obtaining personal financial advice. Update from the Principal Officer. MEMBER NEWSLETTER October 2014 MEMBER NEWSLETTER October 2014 Update from the Principal Officer Dear members It was pleasing to see from the member survey responses that many members are enjoying the Fund s communication and finding