A blue light brigade that benefits society
Classified as lower income earners, blue collar workers make up the backbone of South African society. These include domestic workers, gardeners and casual labourers.
Traditionally, most low income earners have used stokvels as a savings tool, and this is still a viable option. Stokvels have become very popular and most banks and financial service providers have stokvel accounts that one can invest in contributing anything between R50 to R500 as a minimum opening balance.
Applying social science
According to a study done by African Response, there are 811 830 stokvels and 11.4 million stokvel members with a total estimated value of R44 billion in South Africa.There are different types of stokvels ranging from savings, burial and grocery stokvels, to name a few.
From a financial planning point of view, one has to consider issues such as retirement and investment planning from a short-term to long-term perspective for these workers.
Considering options
When looking at retirement planning, one can consider a Retirement Annuity (RA) as a long term investment strategy because the funds can only be accessed after the age of 55. The major benefit for a low income earner of investing in an RA is that it will provide the blue collar worker with an annuity income that the worker will receive after retirement rather than the tax benefits.
At retirement, one can only access up to one third of the fund value. Two thirds of the fund value would have to purchase a compulsory annuity to provide for an income after retirement.
Currently, a full commutation will be allowed should the fund value fall below R75 000 at retirement age. This will increase to R247 500 on 1 March 2016.
Go low cost
The newly-introduced tax free savings accounts are a cost effective investment plan that one can consider for their workers. This account can be used to save for anything including , unforeseen expenditure and education.
The major benefits of the tax free savings accounts are that there is no tax - capital gains tax and dividends tax - incurred on the investment. This is particularly good for blue collar workers who usually are under the tax threshold and should not be paying tax on investments which they would in any other investment eg Dividends withholding tax.
Flexible liquidity
This investment plan offers liquidity and there is no fixed term to the investment or restrictions to the number of withdrawals, which allows for flexibility.
It is also worthwhile considering an affordable life policy and funeral cover as part of their risk planning alongside their retirement planning.
The table below is a summary of the investment options:
Advisers often deal with clients who either have a domestic worker who has been part of their family for many years, or they are dealing with clients who have a very small company with three or four employees they would like to offer some solutions to in terms of retirement. As an adviser, these options are worth considering.
