3 Things to consider before making a provident withdrawal

As a member of an employer-sponsored pension or provident fund your retirement savings are usually on auto-pilot: the monthly contributions flow unseen to the responsible administrator and to your fund managers of choice, or into the default portfolio. This detachment, however, ends when you leave your employer.

Suddenly, you have to make all the decisions – and the decisions you make will have a major impact on the quality of your retirement. Chris Veegh, Head of Consulting at 10X Investments, says that more importantly you must choose between preserving your savings or not. “Regrettably, the majority of people cash out, pay unnecessary tax and cause irreparable damage to their retirement lifestyle.” 

Veegh says that the sensible option is to transfer your savings, tax-free, to your new employer’s fund, or to a Preservation Fund or Retirement Annuity. “This preserves not just your savings and attached tax benefits, but also keeps your money growing until you do claim.”

Given the apparent complexities, it may be daunting to make your own investment decisions. But, in essence, you need to focus on just three things:

1.     Asset Mix

Your mix of growth and defensive assets should be appropriate for your investment time horizon. As a long-term investor you should have high exposure to growth assets such as shares (equities) as these habitually deliver the highest return, despite intermittent corrections.

“Once your time horizon shortens to less than five years, increase your weighting in defensive asset classes such as bonds and cash, for a lower, but more secure return. Alternatively, choose a life-stage fund that adjusts your asset mix automatically to your investment time horizon,” explains Veegh.

2.     Fees

Choose a low cost fund. The fees you pay have a dramatic impact on your savings outcome. For every 1% in fees you save per annum, you will have almost 50% more money after 40 years. Ideally, you should never pay more than 1% pa for admin, investment and advice. “Do not equate higher fees with better quality; with investing, you get what you don’t pay for,” cautions Veegh. 

3.     Investment Style

When it comes to your investments, you can choose between active management and indexing. With an index fund you secure the average market return at a low cost and avoid the risk of investing in a poorly-performing fund. You can do better with an actively-managed fund, but the odds are against you: only around 20% tend to outperform the index return over time.

As no one can reliably predict the future, your chances of picking the winning fund manager are not much better than playing Russian roulette…but with only one chamber empty!

“Investing optimally is not rocket science, even if the retirement industry pretends otherwise. Get these three simple preservation decisions right and you can safely go back on auto-pilot,” Veegh concludes.