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SUB CATEGORIES General |  Savings & Investments |  Annuties | 

Retirement planning today crucial to securing a better future

28 July 2021 Hollard Life Solutions
Willem Smith, Hollard Life Solutions

Willem Smith, Hollard Life Solutions

As many as 50% of South Africans do not have a retirement plan, according to the 10X Investments Retirement Reality Report of 2020, and only 6% of the working population will have a decent retirement, according to the National Treasury.

The chronically low statistics for a retirement plan among South Africans points to an overwhelming majority of the productive workforce that will in a few years be dependent on government social grants to sustain them when they retire.

Willem Smith, Executive Head of Distribution at Hollard Life Solutions says, “Signing up for a retirement plan may seem unnecessary for many young people who are in their prime, as retirement may seem like a distant prospect. However, the reality is that the earlier one saves for retirement, the more funds they will have as their nest egg to live comfortably during their golden years. Retirement planning is about forward thinking to create a better future, and this is crucial to contextualising the significance of retirement planning. Our view is that it is the responsibility of industry players ensure that we play our part in creating broader access to these solutions, by providing information to create a more financially literate community and nation.”

He adds that is important to save up for retirement because the reality is that family may be unable to support the older generation when they are no longer able to work, inflation may erode the value of savings and the desire to enjoy certain hobbies or some of the basics will require cash.

“Inadequate financial literacy is one more snare in the poverty trap. It is our view at Hollard that if South Africans are given an opportunity to learn basic financial management skills, they will be empowered to make better financial decisions that can have a profound impact on the way they choose to live their lives, manage their affairs and, most importantly, allow them to create a better future for themselves and retire comfortably,” says Smith.

He says that proper retirement planning begins with determining where we are in the retirement planning life cycle. “The retirement life cycle will determine the amount of savings that one needs to put aside for retirement. People who are in their middle age may need to save more compared to those in their early 20s who are just starting out. It is important for young people, even in their first jobs, to immediately start their retirement savings, and with time as they earn more, they can put more towards their retirement.”

The 20 years between ages 20 and 45 is the most optimal time to save, since the earlier one begins the more quickly they can work to create and secure a better future. The final preparation stage from age 45 to the date of retirement is the time when people must regularly review the status of their accounts and consolidate them in a way that increases the likelihood of success. “This stage is the last step before retirement and therefore it is critical that retirement planning is done effectively,” says Smith.

He highlights that the key to managing money better and investing successfully in a retirement plan is to draw up a savings plan with short-, medium- and long-term goals. In addition to this, saving and living within one’s means should be an integral part of anyone’s financial journey.

“Many people dream about their retirement as a time they will spend doing what they love. However, to ensure financial security when you reach retirement you need to start planning in your younger years, because you may need more money than you expect. However, factors such as an increasing number of years spent in retirement, lower returns on normal savings, unforeseen events and increasing medical costs may erode whatever savings one has made for retirement, leading to reduced income. It is therefore important that people should take these unforeseen circumstances into consideration, as well as the impact of inflation on their savings,” notes Smith.

He points out that a retirement plan is not a one-size-fits-all plan, because it is determined by the retirement goals and the desired retirement lifestyle of each individual. It is these variables that will determine the kind of retirement solution an individual needs and should choose as their retirement savings vehicle.

“Many people struggle with how to manage their money. With the added burden imposed by the Covid-19 pandemic, a lot of households have struggled in balancing their expenditure and savings, and financial literacy can mean a difference between drowning in debt or living off an overdraft. But all of this requires setting up financial goals and a plan that a consumer will adhere to,” highlights Smith.

So, how do consumers make sense of the range of retirement solutions that are out there in the market?

The most common retirement offering is the Retirement Annuity (RA). This is taken out by an individual and pays out at retirement age. The pay-out is made as a lump sum or monthly pension.

An employee pension fund is run by the employer or government and deducts a maximum of 20% of the employees’ salary as a contribution to retirement. These funds can be transferred to a new pension fund when the employee changes jobs, a maximum of one-third of the funds can be paid as cash. Alternatively, a pay-out of one-third can be paid as a lump sum upon retirement, with the rest of the funds paid out as monthly pay-outs.

A provident fund is run by the employer who deducts a maximum contribution of 20% of the employee’s salary and pays out at retirement age. The employee is paid out when they leave the job, or the funds are transferred to a new provident fund, or taken as a lump sum and taxed. Additional benefits include disability cover among others.

“Of importance to note is the tax benefit that comes with retirement contribution. In addition, the contributor receives a maximum tax benefit of 7.5% of their salary,” highlights Smith.
Life annuities are an insurance product that is purchased by an individual. They pay out monthly contributions to an individual upon retirement age and continue to do so for as long as the individual is alive.

A living annuity is an insurance product bought by an individual that pays out monthly sums while the rest of the funds are invested to grow, to make the annuity last longer. Term annuities form part of the retirement product offering and pay monthly sums for a fixed period of time only.

Unit trusts involves buying shares that are pooled to be collectively managed by a trust. An investor earns through periodic dividend pay outs. The investor can sell their units at any time to receive access to their funds.

A more popular way to save is where an individual opens a savings account with a bank to save money (a bank savings account). Savings accounts earn very low interest, but individuals have immediate access to funds. However, this is not ideal for retirement savings.

Smith advises that, “The key to having a retirement fund that works for you is to save as much as you can as soon as you can. People should also understand their appetite for risk, and have realistic expectations for a return on their investments. In addition, when investing for retirement, it is always advisable to have a varied investment portfolio. Saving for retirement is a long-term investment and therefore people should approach it as such and should desist the temptation of being swayed by fleeting market changes.”

Quick Polls

QUESTION

South Africa’s Financial Sector Conduct Authority (FSCA) has the power to raise revenues by issuing administrative penalties and fines against non-compliant financial services providers, with this money flowing back to the Treasury… Does this, in your view, create a regulatory / government conflict of interest?

ANSWER

Absolutely, as conflicted as it gets
Maybe, I’m on the fence on this
No, the FSCA can do no wrong
The guilty must pay
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