So Much For A Retirement Scheme

I RECENTLY received a marketing letter from a very well-known, established financial enterprise urging me to increase my contributions towards my retirement.

The letter included the following information: Contribution per month – N$ 150 for 12 years [Annual premium increase at 5% included]. Illustrative retirement capital with a 5% growth rate – N$ 29 793.That did not strike me as fantastic so I calculated the total amount that I would be paying over the 12 years including the 5% increase every year.That came to N$28 650 – almost as much as I was going to be getting back from them! In fact the difference of a little more than N$1 100 is less than 5% of what I have paid over the 12 years! It is only 3.99%! I then calculated what the same investment in an ordinary savings account at a bank would give me if I made paid in N$150 per month for twelve years and received 5% interest on the balance at the end of every month.That came to N$29 514.Almost the same as the payout from the retirement scheme.The big difference being that I would only have paid in N$21 600! That is N$7 000 LESS than the retirement scheme.So, the savings account gives me a total return of a bit more than N$8 000 on an investment of N$21 600 while the retirement scheme gives me about N$1 100 on an investment of N$28 650.What I would like to know is – who gets the N$7 000? The investment consultant? And then – will I ever see the N$29 793 from the retirement scheme? Never! At best I will receive about N$10 000 if I chose to exercise that option and the balance is invested on my behalf to generate a pension for me, probably around N$80 per month if the interest rate is also 5% [N$120 pm if I don’t take the N$10 000].And when I die, the remaining N$20 000 simply disappears as far as my beneficiaries are concerned.With the savings account, if I leave the entire capital in the account, I will get about the same, but when I die, the capital will go into my estate and pass on to my beneficiaries.If there is a response to this letter in your column let me predict some of its content.1. There are no tax benefits from the savings account and all interest is taxable.2. It is very easy for an investor to stop payments into a savings account.3. The interest rates on retirement schemes have always been higher than those on savings accounts and will probably maintain that position in the future.4. The comparison is invalid because it does not compare/ignores/omits blah, blah, blah.I still want to know – who gets the N$7 000? Werner Via e-mailIllustrative retirement capital with a 5% growth rate – N$ 29 793.That did not strike me as fantastic so I calculated the total amount that I would be paying over the 12 years including the 5% increase every year.That came to N$28 650 – almost as much as I was going to be getting back from them! In fact the difference of a little more than N$1 100 is less than 5% of what I have paid over the 12 years! It is only 3.99%! I then calculated what the same investment in an ordinary savings account at a bank would give me if I made paid in N$150 per month for twelve years and received 5% interest on the balance at the end of every month.That came to N$29 514.Almost the same as the payout from the retirement scheme.The big difference being that I would only have paid in N$21 600! That is N$7 000 LESS than the retirement scheme.So, the savings account gives me a total return of a bit more than N$8 000 on an investment of N$21 600 while the retirement scheme gives me about N$1 100 on an investment of N$28 650.What I would like to know is – who gets the N$7 000? The investment consultant? And then – will I ever see the N$29 793 from the retirement scheme? Never! At best I will receive about N$10 000 if I chose to exercise that option and the balance is invested on my behalf to generate a pension for me, probably around N$80 per month if the interest rate is also 5% [N$120 pm if I don’t take the N$10 000].And when I die, the remaining N$20 000 simply disappears as far as my beneficiaries are concerned.With the savings account, if I leave the entire capital in the account, I will get about the same, but when I die, the capital will go into my estate and pass on to my beneficiaries.If there is a response to this letter in your column let me predict some of its content.1. There are no tax benefits from the savings account and all interest is taxable.2. It is very easy for an investor to stop payments into a savings account.3. The interest rates on retirement schemes have always been higher than those on savings accounts and will probably maintain that position in the future.4. The comparison is invalid because it does not compare/ignores/omits blah, blah, blah.I still want to know – who gets the N$7 000? Werner Via e-mail