A strong call to save for retirement
Only six out of every 100 South Africans is likely to retire comfortably. The balance will have to rely on support from relatives, or in the worst case on a government pension, to survive. This means that one of the most important challenges facing individual savers is to prepare adequately for retirement.
There is a growing need for independent financial advisers to assist their clients in achieving this long term goal. This fact should be read in light of the need for financial planning, rather than just financial advice.
Advisers need to raise their game from simply telling their clients about a product, to being able to help clients to develop comprehensive financial plans, and advise them on how individual products can be used to realise these plans!
Poor savings record is a problem
The problems we have with saving for retirement are evident in the world of ordinary savings too. In recent years, South Africans have sacrificed saving activities for the instant gratification associated with spending!
Savings as a percentage of GDP has been in the decline since 1980 - with the number falling to around 13% in 2006.
ABSA chief economist, Christo Luus says that "Personal savings, in particular, [are] at abysmal levels. This is associated with the enormous increase in the willingness of individuals to incur debt in the past 25 years or so, accompanying the emergence of rampant consumerism and the availability of a mind-boggling range of credit facilities."
Our love affair with credit is creating a number of problems for the economy too. As more South Africans immerse themselves in debt, they drive consumer price inflation higher, forcing the Reserve Bank governor to raise interest rates.
Luus feels that one of the best ways to increase the rate of personal savings would be to make changes to the tax system, including full tax exemption on interest earnings and the abolition of the Secondary Tax on Companies Tax (STC). While Trevor Manuel will probably announce more interest rate concessions in his budget speech next week, the STC on companies is likely to remain in place for now.
Liberty's 'love the taxman' campaign
In an attempt to encourage saving for retirement, Liberty launched a marketing campaign titled love the taxman. The campaign is meant to create awareness of the tax benefits associated with retirement annuities (RAs).
Liberty Life Divisional Director of Marketing, Howard Fox says:
"We realised that despite the fact that government has created a sizeable incentive as part of its drive to encourage a culture of long-term savings in the country, many people are simply unaware of just how much they can benefit from this.
"This takes on extra significance when one considers a recent survey which found that of people who have reached the age of 65, 47% are dependent on relatives, 31% are forced to continue working or take up second careers and 16% are dependent on a state pension - a mere R820 a month. In stark contrast, only 6% are financially independent."
Government has long been aware of the importance of the life industries' contractual savings products. These products are essential tools for individual retirement planning - and much of governments recent regulation is aimed at protecting the value of clients funds in such products.
The nature of the retirement industry is likely to change further in coming years. Government has proposed a National Pensions Scheme with the aim to increase the reach of the current Social Old Age Pensions. There has also been a strong focus on guaranteed early termination / surrender values on products sold by the life industry.
Editor's thoughts:
The age at which individuals begin planning for retirement continues to decrease. Your best plan of attack is to make use of the advantages of compounding interests and returns by starting contributing to your chosen retirement vehicles as early as possible. Any comments on the financial advisers role in retirement planning can be sent to [email protected].
