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Little to no recovery from pension withdrawal

Increasingly mobile workforce cash in on pension savings.

Far too many South Africans succumb to the temptation of “living it up” when they change jobs by cashing in their retirement savings and consuming it.

They will most probably never be able to recover that “loss” of savings before they retire, says Mark Lapedus, divisional director for product development at Liberty.

He says the workforce has become much more mobile than a few decades ago when people stayed at one job until retirement.

“They are moving around every couple of years, and although they may be contributing to their company retirement fund while they are working, most tend to cash in and consume their savings when they leave.”

A Sanlam survey done two years ago indicates that 77% of members (of retirement funds) who withdrew from a fund due to retrenchment or resignation took some or all of their retirement benefit in cash.

While 63% used some of this cash to reduce debt, 33% also used some of their savings for daily living expenses.

Lapedus says many continue doing this until they reach retirement. All they then have is the retirement savings accumulated at the last job they had.

“It could be anything from one year to ten years. It is not going to be the 30 or 40 years of savings that they will need to retire comfortably.”

Government’s retirement reforms, specifically aimed at mandatory preservation of retirement savings in provident funds, have been thwarted by labour unions for many years.

“There is a concern around what will happen to people who are without a job. It may be a great worry as to what will happen to them when they retire. However, it is more important to worry about what will happen to them next week,” Lapedus says.

“If that is the only way they are able to survive until such time they are able to find a new job, you cannot force them not to access their savings.”

Beatrie Gouws, member of the South African Institute of Tax Professional’s personal income tax committee, says low contribution levels and a lack of preservation are some of the results of the continued infrastructural challenges experienced in South Africa.

She refers to the high unemployment rate, currently 26.5%, and substantial and continued structural inequality.

“Many South Africans are financially responsible for more than their immediate family. The benefits of compounding (preserving retirement savings) notwithstanding, the option to contribute substantially to a retirement fund, or to preserve upon resignation is often a luxury,” says Gouws.

There has been a number of proposals to address these concerns and realities, hopefully we will come to a position where we will be able to have some form of default preservation as opposed to forced preservation,” he says.

This means people must be given access in certain circumstances when they do not have any other option to survive.

Lapedus says the tax implications for withdrawals from pension funds, provident funds and retirement annuities before retirement is considerably harsher than at retirement age.

In South Africa the legal retirement age is 55 years, but most of the pension and provident fund rules stipulate 65 years as the legal age to retire from the funds.

The retirement tax table for early withdrawal from pension and provident funds allows for a tax-free lump sum of R25 000 compared to the tax table for retirement, which allows for a tax-free lump sum of R500 000.

This is exactly the right “disincentive” to stop people from withdrawing from their funds, he says. In terms of pension funds, it is already mandatory at retirement to preserve two-thirds of the value in a retirement annuity.

Government reforms have been aimed at harmonising mandatory preservation for all funds (pension and provident funds). Members of provident funds are, however, currently still allowed to withdraw the full value of the fund at the time of retirement.

The benefits of not withdrawing before retirement include the tax relief given upfront (income tax deductions on contributions) and tax-free growth while the savings remain in the fund.

It is only when one takes income from retirement age onwards that one will be paying income tax on the amount of income. People contributing to retirement annuities can retire from the fund at the age of 55 years, but they can also continue contributing – if they have the means to do so – indefinitely.

According to Lapedus, there is no magic number on the amount of income one will need post retirement. Many people do, however, target to have a post retirement income of 75% of pre-retirement income.

This is assuming there are no debt and no “kippers” (kids in parent’s pockets eroding retirement savings), a phrase coined by tax lecturer Prof Matthew Lester.

And as American boxer George Foreman said: “The question is not at what age I want to retire, it is at what income.”

Savings example: A client saves 7.5% of his salary each year, gets a 6% per annum salary increase and 7% per annum asset growth:

  •  If he saves from age 30 to age 65 and then transfers to a living annuity drawing 2.5%, his initial retirement income will be 100% of his pre-retirement income.
  • If however he only starts at age 40 (either because he starts late or changes jobs and spends the accumulated savings), this drops to 67%.
  • If he starts at age 50, this drops even further to 38%. In order to get back to 100% he would need to contribute 20%.

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COMMENTS   4

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There is a huge time bomb ahead. All these employees drawing their pension benefits will join the queue for a state pension. 13 000 000 now and probably 20 000 000 in the future. The Rand will probably trade at 25 / US $

This is how Liberty Life prepared me for retirement age 66
I paid into my liberty policy from my bond account 167,080.00
Liberty draw it from my Bond acc so interest cost me 217,100.00
That is what the policy cost me in total 384,180.00
This is what Liberty gave me in cash at retirement 235,000.00
So i am left with a hole in my bond account of – 149,180.00

Fortunately i made other plans for my retirement but this policy was a disaster.

I think many South Africans do not realise that in the short-term, before having saved 6 months of emergency funds, a retrenchment protection plan can be beneficial.

Currently I am trying to build up mainly for emergency. Unfortunately my salary, like many other South Africans’ does not allow to save for retirement and emergency requirements simultaneously.

Even then, thinking about it I need to save 20-25% of my income to have a reasonable retirement and I’m not sure how I’m going to manage that.

Thinking of investing in my own education so I may achieve and hopefully supersede the above retirement requirements, but by then I will need to save perhaps 30-35% of my income in any case.

Financial education is sorely lacking and people like myself catch on, but by then it is often times a little late which makes it difficult.

Maybe if the government stopped ripping us off with excessive taxes, maybe people would be left with better options. On top of that, the dismal performance of RA’s, provident and pension funds have left most people high and dry. What makes matters worse is that the pensioner has no idea what the tax legislation will do to their pension on retirement. This is therefor another reason why people are taking lump sums; I for instance want to or have to invest it in an alternative investment to get better potential returns, since just about all fund managers have no idea what to do with everyone’s hard-earned money!

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