Edition: May/July 2018
Preservation is vital
Roger Spence, Principal Executive Officer of the Corporate Selection Suite of Umbrella Retirement Funds, sponsored by Liberty, says that it is essential for fund members to understand the importance of saving for retirement.
According to the South African National Treasury, only 6% of the population will be able to retire comfortably; that is, without having to change their standards of living. Most people do not know enough about the retirementsavings industry. As a result, they tend to make poor decisions which negatively affect their retirement outcomes.
In order to achieve a comfortable retirement, it is crucial that members understand how their retirement fund works and what they can do to ensure that they have sufficient money to maintain their required standard of living when they retire.
IDuring my tenure as Principal Executive Officer I have noted that a significant number of retirement-fund members do not have adequate understanding of the consequences of cashing out their retirement fund benefits when changing jobs, therefore making poor decisions regarding the preservation of their benefits.
It has also become evident that employers aren’t helping them to come to terms with the implications. I therefore view the role of the financial adviser as critical in breaching this gap.
The early withdrawal of a person’s retirement savings is one of the major reasons why many South Africans are not in a position to retire comfortably. Shockingly, some industry studies indicate that just over 45% of members did not have an idea of what the consequences were of taking their retirement benefit in cash and how that decision would ultimately affect their retirement outcome.
This is significant as almost half of the members who withdrew their retirement benefits in cash had no idea that this would negatively affect their retirement outcomes. Many members did not even realise the level of tax they would need to pay on their withdrawal benefit.
South Africans on average change jobs about five to seven times during their working lives, and the temptation to cash in on their retirement savings is huge. This behaviour is confirmed by observing that more than two-thirds of members do not preserve their retirement savings when they change jobs.
Power of compound interest
While it may be beneficial for employees’ careers to change employers, it is equally important that these employees preserve their retirement-fund benefits every time they change employers. This will enable employees to secure reasonable incomes in retirement.
Non-preservation means that members’ savings don’t have sufficient time to accumulate. Members then lose out on the significant benefits of compound interest over a long time horizon.
I firmly believe that members should be guided when withdrawing from their retirement fund and be provided with relevant information to enable them to make informed choices on what to do with their retirement savings.
The preservation of their retirement savings should always be their first consideration.
Members’ benefits can be preserved and kept in the retirement-funding system by placing them in a retirement annuity, transferring them to the new employer’s fund or transferring them to a preservation fund.
Essential questions that members should ask are:
Too often I have found that fund members only confront these most important questions as they approach their retirements. In most cases, this is too late to alter the outcome. But by understanding the answers to these questions, members would be able to make informed decisions and build realistic expectations about their income in retirement.
Ultimately, the high percentage of people who aren’t able to retire comfortably is a highly complex problem in our society. It will require a multidimensional approach from various stakeholders during the lifecycle of a fund member.
Disclaimer: The information contained in this communication is not to be construed as financial advice in terms of the Financial Advisory & Intermediary Services Act of 2002 or any other form of advice. No warranty is provided that the information is appropriate or suitable for any particular purpose.