Investments - Frequently Asked Questions
1. WHAT IS THE DIFFERENCE BETWEEN A RETIREMENT ANNUITY AND A UNIT TRUST?
A retirement annuity and a unit trust (collective investment scheme) are investment ‘vehicles’. These are merely vehicles through which you invest your money into the variety of investment funds out there.
It may be best explained using an example. Imagine a motor vehicle. It comprises of the outer shell and the engine. You need both in order for it to be operational. The engine however is the element of the vehicle that makes it move. Without the engine the vehicle is without use.
It works a similar way with investments. The retirement annuity or unit trust is the outer shell of your investment. What creates the value within this investment is the fund you’ve invested in (i.e. the engine).
A retirement annuity and a unit trust each have a different set of rules associated with them.
These rules can be summarised as follows:
|Retirement Annuity||Unit Trust|
|Contributions are tax deductible||Yes||No|
|Returns are tax free||Yes||No|
|Access to the money||From age 55||At all times|
|Capital Gains Tax implications||No||Yes|
When you access the money from a retirement annuity you are legally only allowed to take one third as cash and the remaining two thirds needs to be used to purchase an annuity (a monthly income stream). There are also some tax implications that need to be carefully considered.
Your financial advisor should review the variety of different investment vehicles out there to decide which vehicle suits your needs best.
2. HOW MUCH DO I NEED TO SAVE FOR MY RETIREMENT?
Everyone’s retirement needs are different. To work out how much you will need, you must think about the sort of lifestyle that you expect to have when you retire. You would need to ask questions like:
- How many years you have until retirement?
- What realistic return can you achieve in the market over this time?
- What is your current affordability to save on a monthly basis?
- How many years you expect to have in retirement?
- What will your cost of living be in retirement?
- What contingencies do you want to plan for (for example getting sick in your old age)?
Your financial planner must take all these factors into account when working out how much you need to save for retirement. Sometimes it becomes clear that you will not be able to live the life you dreamed of in retirement. Your financial planner will be able to suggest ways to remedy this or at the least set your expectations.