Switching means ditching wealth retirees can’t afford to lose – Absa

Retirees who switch investments run the risk of incurring ‘forgotten costs’ that may reduce their capital and erode their ability to earn the returns they need to make ends meet.

The alert comes from Yedwa Mjiako, Managing Director of Absa Mortgage Fund Managers, the participation bond arm of Absa Investments.

Participation bonds offer a secure monthly return linked to prevailing interest rates and are a favourite with retirees who can’t afford capital loss. However, a second year of historically low interest rates has prompted some retirees to consider alternatives, raising concerns about switching costs.

Some retirees forget about upfront costs and adviser’s fees. It can therefore be a shock when capital values are cut on a switch from a ‘part bond’ to a new investment product.

“Switching decisions should always be fully informed decisions,” says Mjiako.

“Unfortunately, some clients don’t fully appreciate the impact of fees on capital that is moved from one investment product and put into another.

“Upfront fee deductions obviously cut into available capital, but the extent can sometimes come as a surprise.”

In these circumstances, the reduced capital sum then has to work that much harder to earn the desired monthly return.

Prime interest rates hit their lowest level in 20 years in November 2010 when rates were cut by half a percent to 9%. Hopes of an early uptick have gone unfulfilled and some commentators now predict low rates well into 2012.

“We understand the pressure on pensioners in this environment,” says Mjiako. “Even a difference in a few thousand rands of capital or a hundred rand drop in monthly income affects their ability to pay for necessities and stay on top of rising food and electricity bills.

“That’s why shaving perhaps 3% off their capital to meet switching costs can affect their ability to make ends meet.”

Absa’s part bond marketers acknowledge that investors are entitled to adjust their investment ‘mix’ in line with changes in the macro-economic climate.

The prerequisite for an optimum outcome, says Mjiako, is informed decision-making.

She adds: “Older people were brought up in an era when people were reticent about money and were reluctant to ask direct questions about commission.

“It is in their best interest to get over their reticence. It is quite acceptable these days to ask directly about fees. Our advice to any investor – especially retirees – is to always ask about costs.

“Don’t only ask in general terms. You are entitled to ask an adviser to calculate the specific impact in your own circumstances and the effect this will have on the net capital that is left over after the switch is complete.”