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Concerns about the future are indeed valid

31 January 2024 Myra Knoesen

Sanlam Benchmark’s research report found 63% of South Africans were anxious about their finances, with 87% saying they felt financial stress. So, does the lack of adequate savings suggest that concerns about the future are indeed valid?

FAnews spoke to Keith Peter, Advice Manager and Lizl Budhram, Head of Advice at Old Mutual Personal Finance about the concerns, the Two-Pot Retirement System and more. 

Lack of a strong savings culture

Both Budhram and Peter agree that these concerns are indeed valid, mainly stemming from the ongoing lack of saving adequately for retirement, as well as inadequate emergency fund savings. 

Supporting the Benchmark report, the Old Mutual Savings and Investments Indicator’s results show that 45% of South Africans are considerably financially stressed, with 70% indicating that they have not seen an improvement in their income since 2020. Sixty-two percent have a savings buffer to last them for only three months or less should they no longer have an income; and 30% claim that they have savings to last only one month, due to the struggle of building savings buffers. Debt levels have increased with 53% of South Africans stating that they don’t have enough money for unplanned circumstances and 34% of home loan holders struggling to meet their repayments or have fallen behind on their payments. 

“The lack of a strong savings culture in South Africans perpetuates the fear about the future. The increase in interest rates and fuel prices have further negatively impacted the ability of South Africans to save. These increases result in people reducing contributions to savings and investment products or worse still, cancelling these savings and investment products altogether. With little or no savings, people will tend to be concerned about having insufficient capital or income to sustain themselves in their retirement years,” said Peter. 

Is it time for a new retirement approach?

“People have different ideas about when and how to accumulate wealth for retirement purposes. The traditional means of retirement fund accumulation is for people to contribute either to employer-sponsored retirement funds i.e., pension and provident funds (compulsory membership) or to private retirement annuity funds (voluntary membership). Retirement annuity funds encompass a wide array of options, including unit trust retirement annuity funds that have low costs and flexibility in terms of payments of contributions.” 

“All retirement vehicles allow people to save in a disciplined manner, thereby encouraging long-term savings, with limited accessibility before reaching the contractual retirement age in terms of the vehicle. In addition, they also provide tax benefits i.e., the contributions can be claimed as a tax deduction, the vehicles themselves are exempt from tax on investment returns; and on retirement, the member is entitled to R550 000 tax-free from the 1/3 lump sum that the member is entitled to withdraw on retirement. Lastly, it’s worth noting that savings accumulated in retirement funds are also not accessible to creditors. These benefits are significant and as a result many investors still favour these vehicles to accumulate retirement capital,” continued Budhram. 

People, she said, are also using discretionary savings vehicles like endowment policies and tax-free savings accounts to accumulate capital for retirement. “These vehicles allow people to make ad-hoc withdrawals without tax. Traditionally some investors have also been strong supporters of using direct property investment to provide a retirement income. These investors purchase rental property and use the net rental income (after payment of rates, levies, maintenance and other costs) to create or supplement retirement income. Whilst crypto assets are historically volatile, some people are using this new asset class or vehicle to invest part of their retirement savings.” 

Peter added that these investment options illustrate that the most suitable retirement planning vehicle is a personal preference, based on a person’s goals, circumstances (financial and non-financial) and affordability. “However, irrespective of the choice of vehicle and asset classes, it is important to save for retirement or be invested in assets that will provide capital or income for retirement. As someone who wants to get fit and stay healthy, you cannot do so if you remain stationary or eat incorrectly. Similarly, if you want to accumulate sufficient provisions for retirement you have to invest in a vehicle or product that suits your needs; and you need to stay committed to the overall plan. People who are in their 20s and 30s and feel discouraged to save for retirement in traditional vehicles can still select a different asset or vehicle that resonates with them and allows them to save for retirement. It is important to note that the actual vehicle chosen is usually less important than the time that one starts to save. The outcome could be better if an individual at age 20 starts saving in a tax-free savings account than starting to save in a retirement annuity at age 40. This is because the investment term is generally a far more impactful factor than the vehicle or asset classes.” 

Can the System improve outcomes?

“The Two-Pot Retirement System has at its core, two objectives i.e., allowing members of retirement funds accessibility to the savings pot (1/3 of all contributions made after 1 September 2024) before reaching the contractual retirement age, and ensuring that members use their retirement pot to purchase an annuity on retirement. Although the funds in the savings pot are available to access once per tax year, members should only access the savings pot if they are in dire financial difficulties to prevent eroding their retirement savings,” said Peter. 

“Employers and administrators must educate employees and members on the Two-Pot Retirement System. This will include the circumstances under which the savings pot should be accessed and the impact that it can have on long-term capital accumulation for retirement. Member education should include informing members of alternative options, instead of accessing the savings pot. Further, administrators should provide members with retirement calculators allowing members to fully appreciate and understand the impact of withdrawing from the savings pot on a regular basis, on their retirement outcomes,” he added. 

Budhram said that in the long run, the Two-Pot Retirement System should have positive outcomes for fund members. “The system will limit accessibility to retirement funds by allowing access to the savings pot, before retirement, creating better long-term capital accumulation. Members are unable to access the retirement pot whilst in employment and even on resignation from employment, before reaching retirement age. Members will have to use the retirement pot to purchase a compulsory annuity when reaching retirement age or the contractual age in respect of voluntary retirement vehicles (retirement annuities). This will benefit members by ensuring that they do not commute their employer-sponsored retirement funds on resignation but rather preserve these savings for their retirement. This compulsory savings, whilst in employment, and compulsory preservation on resignation, will ensure that South Africans will have an improved capital position to provide income for retirement.” 

“The Two-Pot Retirement System is expected to make retirement funds more attractive to younger members because the current accessibility hurdles are removed with the introduction of the savings pot. Younger members would be more inclined to invest in retirement vehicles (especially retirement annuities) because they will now have access to the savings pot (which should be accessed under extreme financial difficulties),” added Budhram. 

“Unfortunately, regardless of the changes the Two-Pot Retirement System will bring about, older members who have cashed their employer-sponsored retirement funds on resignation, will still be in a precarious position on retirement. The Two-Pot Retirement System will not necessarily worsen or improve this situation. Members who elected not to preserve their retirement benefits each time they resigned from employment, will necessarily have depleted their retirement savings. Depending on their age and the number of years they have to retire, the Two-Pot Retirement System may provide them with a small lifeline. They would now be compelled to use the retirement pot to purchase an annuity on retirement and prevent them from cashing their benefits on any further resignations. The important question is whether there is sufficient time remaining before their retirement date to accumulate a meaningful amount in the retirement pot,” continued Budhram. 

Engage in meaningful conversations

Both Budhram and Peter said that financial advisers will need to fulfil an important role in the two-pot conversation.

In their concluding remarks they said, “The impending implementation of the Two-Pot System provides advisers an opportunity to engage in meaningful conversations with customers who are members of retirement funds. These conversations need to be educational and beneficial to the retirement outcomes of members. In these conversations, advisers should discuss the benefits and drawbacks of accessing the savings pot regularly, or even once off.”

Writer’s thoughts

The introduction of the Two-Pot Retirement System is a potential solution to improve long-term capital accumulation, particularly for younger members, however, there may be challenges for older members who have cashed their retirement funds. Financial advisers play a crucial role in educating members and facilitating meaningful conversations. Please comment below, interact with us on Twitter at @fanews_online or email me - myra@fanews.co.za

Comments

Added by John Johnston, 31 Jan 2024
Tax free savings accounts not such a good idea to accumulate capital for retirement. With some clients an advisor has to apply tough love in order to achieve the savings goal for retirement. A famous boxer quipped that "every fighter has a plan until you get punched in the mouth". When that punch comes, (even if it is a little one), it is too easy to grab the money out of the savings account.
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