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Actuarial Society of South Africa: “Tough love” proposals to help you fund your retirement

30 April 2013 Actuarial Society of South Africa

South Africans are far better spenders than they are savers and investing towards a financially sound retirement is generally at the bottom of their list of priorities.

Niel Fourie, Public Policy Actuary at the Actuarial Society of South Africa, says this has prompted Government to look at new measures to get the nation to save for its retirement and to preserve retirement benefits when leaving an employer’s pension or provident fund.

“In partnership with our industry, National Treasury is working on several tough love measures that will force you to preserve your retirement benefits when leaving a pension or provident fund. One of these will force your employer to pay your retirement benefit into a preservation fund when you resign or if you are dismissed.”

Fourie says currently you are given the option of taking your retirement benefit as a cash lump sum or to transfer the money into a preservation fund. According to National Treasury’s retirement reform proposals announced with the National Budget in February this is set to change from 2015.

The proposal states that from a date still to be determined in or from 2015, all retirement funds will be required to transfer members’ balances into a preservation fund when members withdraw from the retirement fund before retirement. Payments resulting from divorces will also have to be paid into preservation funds rather than being paid in cash.

He adds, however, that National Treasury’s proposals are not all tough – one of them will give you access to your preservation fund once a year. In terms of current preservation fund regulations you can make only one withdrawal from your preservation fund before retirement irrespective of whether you make a full or partial withdrawal.

“While this new proposal may at first seem odd, the current system of allowing only one withdrawal has been encouraging people to take all their retirement savings in one go. By allowing one withdrawal a year, Government is hoping that consumers will preserve most of their savings and dip into them only in times of need.”

To make sure that consumers are not forced into expensive debt in times of financial emergencies, the National Treasury proposal recommends that unused withdrawals in any year may be carried forward to future years.

Fourie says the Actuarial Society supports and welcomes Government’s proposals aimed at preserving retirement benefits, because this will ultimately help South Africans afford a better retirement that cannot be bought with the State grant.

Referring to the 2012 Alexander Forbes Member Watch Survey, Fourie says on average less than 6% of employees between the age of 20 and 25 preserve their retirement savings when changing jobs. Less than 10% of those in the 30 to 40 year age group tend to preserve their retirement benefits.

“These statistics paint a grim picture given that the later you start saving for your retirement the more you need to put away to make up for years of lost contributions. Therefore, every time you dip into your existing savings you increase the amount that you have to save in order to make up for the lost amount and the growth you would have received had this amount remained invested.”

Fourie says the following scenarios, while very simplistic, show why it is so important to start saving early and to preserve your retirement benefits:

Let’s assume that you start your career at age 25 and that saving 15% of your salary every year will be sufficient to purchase a decent pension when you retire at age 65. We also assume that you change jobs three times during your working life at age 30, 35 and 40. For the sake of keeping this simple, we’ll ignore inflation.

Scenario 1: You preserve your retirement savings every time you change jobs and therefore you can keep your retirement fund contribution rate at 15%. If you earn R100 000 a year this would amount to a retirement fund contribution of R15 000 a year or R1 250 a month.

Scenario 2: You took your retirement savings in cash when you changed jobs at age 30, but preserved your benefits when you changed jobs at age 35 and 40. To make up for the loss of the first five years of savings, your contribution rate from age 30 must increase to 19% if you want to achieve your goal of a financially secure retirement. On a salary of R100 000 you would now have to contribute R19 000 a year or R1 583 instead of R15 000 a year or R1 250 a month.

Scenario 3: You start preserving your retirement savings from age 35. You will have to increase your retirement fund contributions to 25% of your salary if you want to retire comfortably. This will mean saving R25 000 of a R100 000 salary every year, or R2 083 every month.

Scenario 4: You were a reckless spender until 40 and you cashed in on your retirement savings every time you changed jobs. Reality suddenly strikes you at age 40 and you realise that you need to start saving. You now need to increase your retirement fund contributions to 33% to meet your retirement savings target. On a salary of R100 000 you would have to put away R33 000 a year or R2 750 a month.

“The numbers above clearly show the benefit of preserving your retirement benefits every time you change jobs," says Fourie. "It is therefore important that you resist temptation to dip into your pension or provident benefits unless you really need the money for financial survival.”

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