Delays to retirement reform shouldn’t mean delays to your retirement savings

Richard Carter, head of product development at Allan Gray.

The 2015 Budget reminded us that retirement reform is an ongoing process, with several of the proposed changes potentially coming into effect on 1 March 2016 at the earliest. Understandably, potential investors would rather have certainty before making investment commitments, but delaying saving while waiting for clarity is a bad idea, according to Richard Carter, head of product development at Allan Gray.

Accumulating enough capital to live comfortably in retirement is a daunting task for most people. “To get this right you need to start investing early in life, keep putting aside enough on a regular basis, invest the money wisely and don’t dip into your accumulated capital along the way. Getting any of these four ingredients wrong can undermine the end result,” says Carter.

Bearing this in mind, Carter feels employers have an inherent responsibility to put a retirement savings solution in place for their staff. “While this is ultimately for the employees’ benefit, it has the knock-on effect of illustrating to your staff members that you care about their futures,” says Carter.

To employers considering whether to go with a more traditional retirement fund, such as an umbrella pension fund, or a more modern solution in the form of a group retirement annuity (RA), Carter offers the following guidelines:

1. Consider the investment options available. While many products give access to great investment managers, not all do, and you want to be sure that your employees’ savings will be made to work as hard as possible by managers who are striving to deliver the best returns for the risk taken.

2. Look at the costs and transparency of disclosure. The range of fees and charges of different products can be bewildering. Don’t assume that the costs are similar in all retirement savings arrangements – they can be wildly different and these differences, compounded over a working lifetime, can be the difference between your employees enjoying a comfortable retirement or not having enough to live off.

3. Bear in mind what happens to your employees’ retirement savings if they exit your employment before retirement. In a conventional retirement fund employees have the opportunity to take all the accumulated savings. If they don’t invest these wisely, they end up having to start saving for retirement all over again. By contrast, when they leave a group RA, their individual RAs go with them. While this means no access to cash at a time when some cash may be useful, the discipline of having a pot of money which will be there when you finally retire, empowers people to secure a better future.

“In many ways group RAs can be a better choice for employers and their employees than other retirement funding options, which can have higher costs and time consuming administrative requirements,” Carter notes.

An efficient group RA system allows employers, particularly those in small- to medium-sized businesses, the time to manage their businesses, while avoiding tedious administration requirements, all the while not detracting from the importance of retirement saving for their employees. Group systems also ensure that employees get all the benefits of an individually managed unit trust-based RA, including tax advantages, control of their investment choices, flexibility and portability.

How do traditional employer retirement funds differ from modern unit trust-based RAs?

Unlike an RA, where anyone can invest in their own right, in traditional pension or provident funds, contributions are deducted from employees’ pre-tax salary. Employees often have little control over their investment and when they leave their employer their membership of the fund ends.

Some employer funds give employees a specified retirement benefit – or pension – when they retire. These funds do not give members investment choice or control. In other funds, the benefit is not guaranteed and depends on how much is contributed and how well the investment performs. In these funds, members may be allowed some degree of investment choice.

In comparison, modern unit trust-based RAs simply wrap around a unit trust investment. Members decide how their money is invested (within legal limits), which means they have more control over their potential investment return than they would in traditional employers’ retirement funds.

An added benefit is that RAs are already structured to enforce preservation and provide for an easy transition into a pension at retirement – which are key elements of the retirement reform proposals.

“There has been uncertainty in the retirement landscape for some time, and we don’t expect this to go away overnight. An investor who took a break from saving for the last two years could easily find themselves more than two years behind, as not only have they put aside less capital and missed out on market growth, but they have also set their level of consumption higher. The importance of starting to save for retirement sooner rather than later cannot be underestimated. We can’t get time back once we have spent it,” Carter concludes.