In the previous article I wrote about poor values and penalties on Retirement Annuities and Endowment policies. Penalties are applied because Life Insurers reason that clients have entered into a contract with them over a specified time period and in the case where the contract is not fulfilled, the investor is penalised. It is regularly stated that the costs are for the commission paid to the intermediaries, but in reality these are only about a third of the total costs that are recovered. The life insurers recover, depending on the age of the product, commission from the intermediaries as well as all costs of the contract as if the contract was in effect for the full term.
With Unit Trusts, costs are recovered as and when contributions are received and should the investor discontinue contributions, there are thus no penalties applicable. The investment account, surrender value and early retirement values are thus the same at all times.
There are two types of investment, namely discretionary investments (voluntary) and those that fall under the Pension Funds Act. In the market you will also hear about taxable and non-taxable portfolios. Those that fall under the Pension Funds Act are Pension Funds, Provident Funds, Preservation Funds, and Retirement Annuities. All other investments such as Endowment policies etc fall under the category of Discretionary investments.
Every type of investment, whether it falls under the Pension Funds Act or an Endowment policy (incidentally, these can also be Unit Trusts) or ordinary Unit Trust investments has its own legal advantages and disadvantages and it must be ensured that the correct advantages or investment is offered taking into account the requirements of the client.
Unit Trusts can be used for investments in Pension Funds and Discretionary investments, they cover the full spectrum of the market and include all asset classes that a potential investor would like to invest in. In other words, with one investment you can invest in money market funds, income funds, government bonds, property funds, equity funds etc and so remain liquid in that you can, at any time, move funds to allow for changing investment circumstances, without having to pay penalties.
Investments are, in fact, very simple, they involve the purpose of the investment as well as the time period for which the investor is prepared to invest the funds.
Unfortunately investors like to always feel comfortable with their investments and often buy into funds which they hear are doing well or sell those which they hear are not doing so well. The story is unfortunately often late and usually such an investor is too late to benefit from the improved performance and too negative to stick it out through the period of poor performance. It is at these times that long term investments are often terminated. This is the type of investor that was described recently by a fund manager “You get two types of aggressive investors, the one that invests aggressively when he hears that the market is doing well and the other that acts aggressively when he has missed the bus.”
There are currently about 760 different unit trust funds on the market and in the next article or two I would like to explain why unit trusts are safe investments, how you can choose the correct funds and what the tax implications of each type of investment are.