Using redundancy payments wisely

Press, 29 September 1988, Page 26

Using redundancy payments wisely

By BRIAN FRIEDLOS, Aucorp Financial Services As the economic and business climate tightens, most employers are reviewing the size, cost and efficiency of their operations and are taking steps to streamline their workforce. As a result, employees are increasingly being laid off or asked to retire early and are being awarded substantial re-, dundancy or severance payments. Suddenly, people who have been ordinary salary or wage earners find themselves, say at the age of 50 years with a sizeable lump sum in their hands — often more money than they have ever had to deal with before. A person in this situation will be concerned with two vital require-

ments — the need to find alternative employment to sustain themselves until actual retirement (50 is too young to merely stay at home and tend the roses) and the need to invest their lump sum safely and wisely to provide for retirement. What should you do to preserve your nest egg — and what could you do? One thing is sure; it is important that you put your money in some form of investment lest the relentless advance of inflation erodes it away completely. A study of changes in New Zealand’s Consumer Price Index (C.P.1.) provides a graphic illustration of the devastating effect of inflation on people’s savings. The following table shows the purchasing power in 1950

of $lOO, in the centre column, and in the right hand column the amount required to equal $lOO of purchasing power in 1950.

These figures show that inflation since 1950 has averaged 6.7 per cent a year (compound). This appears to be a relatively innocuous figure, but even at this rate, inflation would have eroded the purchasing power of $lOO at the start of 1950, to only $6 by the end of 1986. To put it another way, to be able to buy what $lOO could buy in 1950, one would re-

quire $1657 today. This proposed a considerable challenge to people who were planning for retirement during this period, simply to maintain the real (inflation-ad-justed) value of their savings. We cannot predict future inflation rates but clearly the battle to protect your savings will be a never-ending one. So what could you do to salt youi- funds away safely and securely for future needs? The majority of people do not have the awareness, expertise or time to set up and manage their own investment programme, and need to look to the experts for advice or purchase a ready-made investment plan. There a number of prepackaged investment

plans available. I would like to introduce you to two types of plans which are ideally suited to people who have a lump sum to invest, life bonds and unit trusts. A life bond is designed to provide a lump sum for retirement or for financing special project, for example, the purchase of a retirement home, or simply putting money aside for a rainy day. A life bond is an ideal investment for people who have a surplus of cash sums to invest and which they do not need to draw on immediately for income. In simple terms a life bond is a single premium or lump sum deposit life insurance policy. The life insurance company pays the income tax due on its investment returns and therefore

there will be no further tax liability on the investor. Unit trusts are also designed to generate a lump sum for retirement. or some other future capital requirement. A unit trust is an investment vehicle that provides a facility for pooling investors’ funds. Subscribers or unit holders as they are known, benefit from this managed fund concept by participating in both the income of the trust and the capital growth of the trust assets, in direct proportion to their unit holdings. A unit trust is a unique investment concept especially suited to both the small and large investor. At present the types of plans I have referred to are subject to changes in taxation law and practice.

1950 $100 $100 1955 $71 $141 1960 $61 $164 1965 $54 $187 1970 $41 $246 1975 $25 $404 1980 $12 $804 1985 $7 $1401 1986 $6 $1657.