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Top-up trend good news on savings and inflation fronts, says Liberty

26 May 2008 Liberty

The need for higher domestic savings is increasingly recognised by South African salary-earners.

The good news comes from Liberty Group at a time when the authorities are becoming concerned that chronically low savings rates will hobble the nation’s growth plans and make us ever more reliant on foreign inflows to cover our balance of payments deficit.

Kieran Godden, Divisional Director of Specialised Corporate Consultancy at Liberty, points out: “Our corporate products in the employee benefits market are extremely flexible and enable top-up payments by individual fund members. A recent trend is for greater recourse to these top-up facilities.

“Retirement products usually provide the facility for increased contributions based on any changes in the member’s remuneration.

“A little known fact is that a clients’ retirement fund provides for a voluntary top-up which compounds an automatic pay top-up – creating an opportunity for increased savings for salary-earners. These voluntary top-ups can be made monthly or annually and are tax deductible up to certain limits.”

Liberty Life administers more than 12 000 retirement schemes. The collective value of retirement savings within these funds exceeds R40 billion. Its retirement fund products can be tailored for small and medium-size enterprises, individual entrepreneurs, professionals and major corporates.

The top-up trend has been noted at companies of all sizes and among individuals making use of portable pension schemes and new generation flexible retirement annuities.

Liberty trend-spotters ascribe these developments to several factors, including:

  • Growing uncertainty about the future following a spate of interest rate hikes
  • Inflation rates surging past the 6% official ceiling, taking us back to double-digit inflation
  • A stalled housing market after five years of upside and the realisation that higher equity in your home can’t be taken for granted
  • Liberty’s increasing use of ‘life stage’ tools to prompt responsible financial planning that aligns changing needs with changes in provision, including top-ups where necessary

Positive developments are balanced by some blind-spots.

Concerns around inflation are crystallised by calculations on compound interest tables – a tool used with increasing frequency in the insurance industry. For example, at inflation of just 7% a monthly income of R10 000 will be eroded to roughly R3,600 in just 15 years.

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Godden notes: “This tells members that higher saving is a must. Similar projections should tell them that in the event of premature death their surviving spouse will find it almost impossible to maintain current living standards over a protracted period. Therefore, increased life and disability cover also makes a lot of sense.”

However, this rarely happens. The standard group life and risk benefits are usually left in place, even though the Liberty product suite permits periodic tweaks in response to individual concerns.

Liberty strategists in the employee benefit market acknowledge that employer-sponsored retirement funds and group risk schemes represent the only insurance and investment products many South Africans will ever have.

Godden adds: “This makes it vital that we as responsible advisers make optimum use of flexible product features to encourage additional provision in all savings, investment and risk categories.

“When salary- and wage-earners give themselves just one shot at a secure future, it’s imperative that that ‘shot’ achieves the most ‘bang’ for every ‘buck’. In this context, top-up facilities are crucial.”

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