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Retirement financing for domestic workers is imperative because they have no access to formal retirement funds. Employers and staff are therefore faced with decisions on alternative products to fund for retirement, including savings accounts, unit trusts and endowment policies. These products are aimed at retirement saving and need a fairly conservative risk profile.
One dilemma is deciding in whose name an investment should be made. If monthly payments are part of the package, then it is a worker's money and should be in their name. If both jointly fund the policy, or if the employer pays it all, then they need to reach an agreement.
And the employee is entitled to all the contributions plus interest and growth, on leaving one's employ.
When employees leave, they should be able to take the investment with them and transfer the stop order or debit order to their new employer.
Had the investment been in the worker's name, the employer could cede the investment to the employee. The employee should not be forced to cash in the investment, but it should be left to grow.
The type of structure and investment depends on how close the worker is to retirement. One with less than three years to retirement would have to consider a savings account. Even though these do not have exciting returns, the risk is negligible for people close to retirement. But if you are aged 25, endowment policies or unit trusts are better options.
Endowment policies are only an option for the medium-term if savings are not withdrawn for at least five years. Although historical performances of endowments have not been as good as unit trusts, they do offer some capital guarantees. General equity unit trusts carry no guarantees. They may be suitable for a young employee who will not touch the money for many years. The risk of market fluctuations is ironed out by the longer investment horizon. It is imperative that domestic workers understand the implications of an investment that has a risk.
As they near retirement they could consider swapping some of their cash out of unit trusts and endowments into a savings account.
Market research shows that apart from providing money at retirement, workers want a good funeral benefit for themselves and their family. They also want medical cover, a cash lump sum and to be able to borrow or withdraw from the fund. Several hybrid products are available, offering a range of policies in one.
The problem arises when so many workers with years of service have no benefits. In this instance, to start them off, employers will have to try and add an amount to current contributions to make up for all the past years of service.
l Hirsch is a director of Pioneer Financial Planning. Visit www.pioneer.co.za