South Africans must continue to save for retirement needs as reforms unfold

Professionals, such as doctors, engineers, accountants and lawyers, as well as other higher earning white collar workers need to continue to provide for their own retirement savings needs, but should closely monitor the proposed retirement industry reforms, outlined by the Minister of Finance in the 2011 Budget Speech.

That is the view of Gerhard Joubert, Head of Group Marketing at PPS, who says that it is clear from the Minister’s speech that reforms will be implemented on a gradual basis. Joubert says, however, that as these reforms unfold, it is crucial for professionals to stay abreast of the changes, as these could have serious financial ramifications for them.

For example, the introduction of the R200000 cap from next year on the amount deductible from tax for retirement savings will negatively affect retirement fund members who earn more than R888,888 per annum.

According to Nick Battersby, CEO of PPS Investments, over that level, the individual is effectively driven away from the products governed by the Pension Funds Act towards other discretionary products, which are often unregulated. “South African consumers already have inadequate replacement ratios at retirement and this disincentive will likely exacerbate this.”

He adds that for most employees, life and disability cover is offered though group cover in employee schemes, which in turn is linked to contribution rates. These contribution rates will be lowered under this new principle.

“We have always encouraged members to start saving sooner and benefit from longer period of capital growth. It has always been difficult to catch up later in your career because contribution rates need to become much higher to make up for years of lost contributions and growth from a young age. This change will make it even more difficult to catch up, if not impossible. Older senior employees (presumably the high earners) will be forced to prolong their careers which will limit opportunities for the younger generations, which in turn is no supportive of an employment-friendly strategy.”

Joubert says it is important for people, particularly higher income earners, to consult with financial advisors as to how to react to these changes.