It’s great when someone realises they do not want to run out of income one day. When we retire, we effectively write our own salary cheque, so it helps to plan. And while we are not saving for retirement because we want to become fat cats, we do want to be well fed and content enough to curl up on a cushion in the sun. We want to be able to stop chasing mice when our legs are no longer as fast as they used to be.
But should you keep all your retirement savings together, or split them across more than one product? The answer depends on each person’s circumstances and where they are in their retirement journey. A few things are worth considering:
- Tax back in your pocket
- Growth
- Costs
- Flexibility
- Variety of investments (diversification)
Whether you are saving through your employer or in a retirement annuity, the most important thing is that you are saving. Compound growth over the long term can be a lifelong friend. The tax benefit you receive for retirement savings also makes these products attractive, and this applies regardless of where you invest or how many products you use.
That is why it can make sense to save as much as you can through your employer’s retirement fund, or to consider taking out a retirement annuity. There are limits to the amount that qualifies for an immediate tax deduction, but these usually only become relevant at higher contribution levels. If you contribute more than the annual deductible amount, the unused deduction is not lost. It can roll over and may benefit you in the future, including when you retire.
Invest your money appropriately
When choosing where your money should grow, it is worth looking at how much the investment growth can exceed the costs. The cheapest product is not always the winner. What matters is whether your money is invested appropriately, has the potential to beat inflation, and whether the growth after costs is strong over the long term.
Your money will not automatically grow faster or slower simply because it is held in one product or split across two products, especially if it is invested in the same underlying funds and all other factors are equal. You can also diversify within one product by choosing investment funds with different asset mixes. That way, if one asset class is performing well and another is lagging, the overall investment can be more balanced.
Costs are another important factor
Sometimes there are cost advantages to lumping your money together, and some providers may reward you when your savings reach a certain level. In other cases, a provider may reduce your overall costs if you have more than one product with them. These benefits can be attractive, but they should be compared carefully. A financial adviser can help with this calculation. Over the long term, lower costs can improve your growth outcome, and some products may also become cheaper the longer you stay invested.
Flexibility also matters
At retirement, you can usually take up to one-third of your retirement savings as a lump sum, while the rest is used to buy an annuity that pays you a regular income. Some people may prefer to leave part of their savings invested for longer, and in that case, having more than one product may make sense. Others may like assigning different goals to different products, such as one retirement annuity for day-to-day expenses, another for medical expenses, and another for travel.
It also helps to compare the features that come with each product. Can you take a payment holiday? Is there a bonus if you stay invested for longer? Are there loyalty benefits? Can any part of your growth be guaranteed? These features can influence whether one product or more than one product is better suited to your needs.
So, should you lump or split? The starting point is simple: Save as much as you will need before you get to that cushion. From there, the right structure depends on your tax position, costs, investment choices, flexibility needs, and the advice you receive.
