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Rate cuts not good news

21 January 2004 staff reporter

The low interest and inflation rate environment in South Africa is not good news for pensioners living off the interest payments from their investment, says Leon de Wit, CEO of Channel Life, who has just launched their Income Plus product.

"Typically in a low interest environment, it is the young that benefit as they are better able to service their high levels of debt, so they eagerly await interest rate cuts.

However, people who are dependent on a monthly investment income, who have mostly invested in low risk, liquid money market instruments, find that their income has a direct correlation with interest rates.

An interest rate drop means a drop in monthly income. "And while it seems that financial institutions are quick to respond to rate cut announcements, the same cannot be said for the consumer goods sector. The fact is that consumer goods prices continue to grow in line with inflation, causing less disposable income.

"The problem," says De Wit, "is that a pensioner's expense base remains roughly the same, while the return on their investments diminishes drastically as interest rates come down. For example, if rates reduce from 10% to 9%, the pensioner's disposable income drops by 10%.

"People relying on monthly interest income are generally not active investors who watch the equity markets and understand the vagaries of the financial services sector or the myriad of investment products available," he says.

It is a fact that with each investment decision taken, there is an amount of risk that the investor needs to take on. "Ideally this type of investor should be looking for investments that are longer term and extend the time between decision-making points.

"We all know older people who regularly shop around at month end looking for an investment that will provide a greater return than the one they had before. As a matter of fact, our research indicates some R200m being placed monthly in guaranteed type investments.

"So this type of investor, in conjunction with a financial advisor, should perhaps look for a product that will offer a fixed rate of return not connected to the inflation rate, with a decent time gap between decision-making. That will ensure long-term financial security," says De Wit.

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