Sunday 15th July, 2007


Things that make dreams come true

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According to Central Bank statistics, individual savings in annuity plans decreased by 12.2 per cent between 2004 and 2005. More recent official figures are not available.

In the Report on Insurance and Pensions for 2005, they record some 200 active pension fund plans in the country, and another 56 that were being wound up.

Many of these programmes of long-term savings are employer sponsored. These plans are a measure of our long term savings as a nation, and our savings rate reflects both our savings culture and what might be a rise in consumption or just as well: the effect of high inflation.

The reduced savings rate also may be an indicator of a retiring population that may be unable to maintain the current lifestyle or status quo, in future years.

As we saw recently, experts in the US have already determined their own impending crisis and have begun to take initiatives to advise and warn.

There are a few simple rules in long-term savings programmes. The first is that the older you are the less risk you can take with your savings, simply because you have less time in which to recover from a collapse in the markets or a fall in interest rates.

In 1997, returns on a bank deposit of $100,000 yielded as much as ten per cent per annum. By 2001, average investors could have earned as much as 11 per cent on the same amount.

By 2003, however, returns on such deposits had fallen off drastically, so that now if you can get seven per cent per annum for that lumpsum, you are lucky.

Of course you need to bear in mind that the returns on T-Bills are often below the more aggressive competition, and are only a benchmark of what rates of return are actually safe.

In light of these statistics, you can imagine what would happen if time was short, and the projection based on 11 per cent per annum, in year 2000, was required to bear fruit in 2010. The lean years at five or six per cent would cut off a large portion of the anticipated lumpsum.

If you have time, like another ten or 15 years you can hope for the market to turn, and that interest rates would rise. If you have time, you can also look around for better opportunities to manage and work your assets and savings.

I cannot help but repeat that one of the most efficient methods of savings in light of the current inflation rates, which headline at 8.4 per cent, and food inflation approaching 30 per cent, is in tax deferred individual annuity plans. You get a 25 per cent tax shelter!

So what about the safety of these investments in insurance companies?

The law mandates insurance administered annuity plans to set aside asset reserves to match their liabilities. Such reserves must be invested in safe instruments or assets, in other words the insurance company cannot take high risk with your money.

According to the Report, statutory fund assets maintained by life insurance companies amounted to $17.2 billion. Even though that quantum also includes long term insurance liabilities, I quote the statistics to offer some assurance about the safety of such plans.

Of course you must have some fun, and it may involve credit cards, but promise yourself to open your eyes to bigger dreams, like trips to the Far East and days swimming in the South China Sea, it’s not rocket science, it’s hard work, planning and saving make dreams come true!

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