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SUB CATEGORIES Annuties |  General |  Savings & Investments | 

Budget provides welcome relief to retirees

11 March 2014 Jonathan Faurie
Jonathan Faurie, FAnews Journalist

Jonathan Faurie, FAnews Journalist

Since 1994, retirement has been a sensitive topic in South Africa, which has been driven by the harsh reality that the majority of South Africans simply cannot afford to retire comfortably. In an effort to address this, government developed a retirement reform programme which is in the process of being ironed out.

While there were no ground breaking announcements during the 2014 National Budget speech, one of the industries which stands to benefit the most from the moderate budget is the retirement industry.
One of the positive take outs from the Budget is the announcement of an increase in the tax-free lump-sum amount to be paid out of retirement funds at retirement.
Tax relief for lower income members

While tax is the major source of government's income, it is seemingly changing its stance towards taxing lower income individuals to increasing the tax on higher earners.
"The increase in the tax free amount, from R315 000 to R500 000, is a significant and positive move," says Craig Aitchison, GM Corporate Customer Solutions at Old Mutual Corporate who adds that this will have a positive effect of bringing tax relief to lower income members who did not benefit from deductible contributions. "Many people retiring from funds today are experiencing a drop in their income. A bit of tax relief on the lump-sum helps them to receive an improved benefit to make adjustments to their lifestyle, such as paying off debt."
Aitchison also says that government's commitment to seek improved coverage and preservation of retirement funds, and the lower costs associated with these measures, is a positive step for the industry. "While government was firm in its intention to move towards a compulsory retirement system for all employed workers not part of an employee retirement fund, we need to see detailed plans in order to understand how this can help towards South Africans saving more."
Sweating out the wait on retirement reform

Aitchison adds that although strongly emphasising government's commitment to accelerated retirement reform and collaboration with the retirement industry, the Budget did not provide more clarity on the proposals introduced in 2013. "The retirement industry has eagerly awaited progress on these proposals in order to understand how they will impact the various stakeholders in the industry," says Aitchison.
However, Jann Krynauw, Partner at Rezco Asset Management says that this will not likely happen this year as the Financial Services Board is taking a step back during 2014 to make sure that all of the retirement reform initiatives are legally sound.
Aitchison further comments that more work needs to be done to encourage a savings culture in South Africa, especially through the Small to Medium Enterprise engine (SME).
"While it is positive that government expressed its commitment to increase the support and tax relief for entrepreneurs and small businesses, a focussed plan needs to now be implemented on how this is to be done. We look forward to further proposals on this issue in the future in order to clarify a supportive plan of action for this important engine of growth," concludes Aitchison.
A desperate need to encourage a culture of savings

One of the biggest challenges in the South African retirement industry is the fact that the majority of the South African population does not have a strong culture of savings. This needs to be addressed as it is clear that conventional retirement vehicles are often not enough by themselves to sustain a retiree during retirement.
Aitchison made a number of statements before the budget speech, which did come to fruition when Gordhan took the stage. "Over the long-term, a higher savings rate will help stabilise the rand against major currencies. We expect to see an increase in proposals to improve contributions to retirement funds through tax changes, preservation of retirement savings. The tax–incentivised products in the 2014 Budget will enable a long-term savings culture in the country. We also expect the Minister to have firm dates for the introduction of the tax-incentivised products and the tax amendments of retirement funds."
According to the Association for Savings and Investment South Africa (ASISA), 2013 withdrawals from the retirement schemes in the first half of the year - excluding retirement and payment of death claims - amounted to R15 billion. In addition, the Old Mutual Retirement Monitor 2013 found that 61% of members who changed jobs in the past 15 years withdrew some or all of their retirement fund benefits in cash, most opting to take the full amount in cash.
Regulate the vital area

Aitchison believes that one of the ways to increase the savings culture is to have better defined regulations around encouraging people not to cash in on their retirement savings when leaving their place of employment. "Preservation is a key element to enable a savings culture, and having a firm proposal in pace with regards to preservation of retirement funds will go a long way in ensuring South Africans are encouraged to save for this stage in their lives."
The 2013 Old Mutual Retirement Monitor found that 85% of respondents felt that not having enough money to retire was their greatest retirement concern. Aitchison explains that the auto-enrolment proposals by Treasury can effectively address the concerns around our nation's growing appetite for spending and lack of financial preparation for retirement.
"We also expect the progress on government's auto-enrolment initiative, which will require nearly every worker to be signed-up to their company's scheme. Currently only about 50% of employees invest in a retirement fund, yet saving through retirement funds remains an effective vehicle for retirement."
This is particularly important among lower income earners. Aitchison says that to entice low income-earners to save, government should consider paying a small lump sum into these earners' retirement savings, to be accessed only if the person saves for a set period.
"There is a need to determine the size of such a kick-start lump sum and the cost it will have on government revenue. However, even with a modest contribution rate of 3%, auto-enrolment will result in additional savings of more than R20 billion per annum."
Editor's Thoughts:
Reforming the retirement industry is not an easy task, and is only the first step in achieving the ultimate goal of increasing the number of South Africans who can retire comfortably. A more important measure is the encouragement of a savings culture, and it will be interesting to see how committed government is to this objective. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
 

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