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‘Retirement crisis could get worse’

Survey shows higher percentage of people would cash in when changing jobs.

JOHANNESBURG – The percentage of working South Africans likely to cash in their retirement savings if they changed jobs has almost doubled over the last four years.

According to the 2017 Old Mutual Corporate Retirement Monitor, the percentage of people saying they would withdraw their benefits has increased from 19% in 2012 to 35% in 2016. Even where people earn more than R40 000 a month, 27% of respondents still said they would cash in. One-thousand-and-eight urban South Africans, broadly representative of the South African population, were surveyed via telephone.

Malusi Ndlovu, head of Old Mutual Corporate Consultants, says this is quite concerning. People earning at this level have access to financial advice and one would have expected them to be budgeting and saving and not to be in a position where they radically wanted to inject lump sums into their finances.

Even among people closer to retirement (a booster subset of people 55 years and older included in the sample), a significant percentage still signalled that they would withdraw a part or all of their benefits if they changed jobs.

The findings come amid a retirement crisis in South Africa, with only a small percentage of people in a position to maintain their standard of living in retirement. Early withdrawals are one of the main reasons for the dire situation.

While the survey did not specifically ask respondents whether cashing in was due to necessity or to enhance their lifestyle, the increase in the percentage of people signalling an intention to withdraw may be a function of economic factors.

Consumer confidence dropped between 2012 and 2016 and disposable income has come under pressure. Some people have fallen into debt, arguing that a lump sum could relieve the pressure.

Since the research was conducted during the latter part of 2016, the results may also reflect the spill over of confusion around amendments to the Taxation Laws Amendment Act and misconceptions that the proposed changes would result in the government taking people’s retirement money, Ndlovu says.

According to the survey, about 30% of working South Africans have no formal retirement provision whatsoever (58% of those earning less than R5 000 per month).

Andrew Davison, head of implemented consulting, says South Africans earning less than R5 000 per month are in survival mode and although they may be saving in stokvels and grocery schemes, a very high percentage don’t have any formal savings.

In this income segment, the old age grant of R1 600 per month could replace 32% of the monthly salary, and with just a small amount of additional savings, individuals could replace close to 50% of their salary in retirement, which makes saving in a formal vehicle like a retirement annuity less attractive.

Roughly a quarter of people don’t think they would reach retirement age. Debt is also a significant problem – not only are low-income earners highly indebted, but it is often the most expensive debt available.

However, where people earn R40 000 or more each month, the statistics are not vastly better and the “lure of the billboard” may stand in the way of sound retirement decisions, Davison says.

Ndlovu says South Africans are struggling to figure out how to split their money between meeting their needs today and providing for retirement.

There is often also a lack of financial literacy. People are oblivious to the benefits of compound interest and don’t realise the long-term impact early withdrawals will have on their retirement savings, adds consultant Erhard Theunissen.

While the process of retirement reform is slowly taking its course with compulsory annuitisation in the provident fund space still up in the air, average life expectancy has increased significantly. After a fantastic run in equities, local retirement fund members have now entered a lower-return environment.

Is South Africa setting itself up for an enormous crisis 20 years from now?

Davison says this is a difficult issue, “because it is already actually a crisis. That is the reality… already people cannot afford to retire”.

To some extent, retirees in living annuities have been bailed out by the excellent investment returns over a 20-year period, which has masked the fact that people haven’t saved enough. A low-return environment exacerbates the problem, he says.

“I think it is already a crisis. It is just not going to get any better, it is going to get worse.”

The crisis will intensify if the issue isn’t addressed, adds Ndlovu.

In the developed world the lack of provision for retirement and increased longevity have led to a situation where many defined benefit funds (where the employer guarantees a pension in retirement) had to be bailed out, but South Africa is going through these changes at a time when the majority of people are in defined contribution plans (where the member carries the investment and longevity risk).

It doesn’t have the option of being bailed out by the fiscus, Ndlovu says.

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And it will continue to increase.
Government is too weak to enforce compulsory preservation, the circus will continue unabated.

The bigger problem is that compulsory preservation is too restrictive and a gigantic rip off.

While I know that many people draw their money and spend it, I draw mine and invest it in my personal capacity in investments of my choice that don’t have a 3% penalty from the intermediary/platform/investment house combination/confusion/convolution/con.

I only ever have pension funds when they are compulsory at companies for which I work. I always draw them when I leave and with good reason.

You do of course forego the tax deduction and incur a slew of tax costs by investing off your own bat. The retirement industry is powered by subsidisation through the tax system, and as long as that’s the system you should consider playing it if it’s to your advantage.

There is also some comfort in that retirement funds are protected from your creditors (especially if self-employment is a possibility later on).

How I retire is my choice, you can’t legislate it unless you want to subjugate me. I pay lifelong taxes, one way or the other. My old age is my decision, or else you may as well tell me that I can only live up to a certain age…. Society or the Capitalist system wants to suck the every little penny out of people. Life insurance, car insurance, health insurance, medical aid, household insurance, DSTV insurance, cellphone insurance, education policies, etc, etc…. you still have a life to live… Bond, car, rates and taxes, school fees, groceries, electricity, taxes – PAYE, dividend taxes, sin taxes, VAT, Transfer duties,fuel levies, toll fees, license fees…. with all these expenses how do we expect South Africans to save for retirement, or simply save, … we are in bondage forever….

Your view regarding retirement is naïve and unfortunately your attitude to retirement will take you to the brink of despair when you get into your 50’s as you will soon realize that you have too few years to set aside sufficient funds for your retirement. I agree that maybe they should not legislate against cashing in any portion of your pension fund during your working life,but, what they should legislate against is that every single person who applies for an old age pension is subjected to a means test and one of the caveats to getting such a pension is that you never cashed in any of your pension in your working life. If you did cash in for whatever reason then you don’t get a state old age pension, because you were negligent to your estate and your kids, who may have to support you financially.
Its really a case of if you don’t provide for your pension who should – certainly not your kids or the tax payer, so maybe you need to rethink your views on retirement

One could modify that by allowing a pension on a proportionate basis. For example, if you take 25% out in cash, you get a pension of 75% of whatever the maximum is. You could then possibly apply some test such as proving (with medical evidence) that the withdrawal was for that reason only… Thinks. No, someone would fool the system and it would become a free-for-all… It will only work in a country where rules are respected. Not in SA.

I guess that’s why Pravin didn’t bother increasing the Estate Duty rate !

But I agree, people should be able to spend their money as they like, and if the choice is to live high on the hog now and on a much more modest scale in retirement that’s their decision and their right. Everyone has different obligations and different priorities.

Nor would I begrudge you the age allowance, with all those expenses you’ve more than paid for it in VAT.

Compulsory annuitisation of provident funds will NEVER get off the ground.The Nats tried it in days gone by, and the unions said “no way”. Rather spend today and worry about tomorrow when it comes round. Then they rely on the government social grant (if someone is still around to distribute it from April onward, that is)

I would work if fees in the industry were much more regulated and wholly performance-driven. i.e. if my investment with you doesn’t go up by X amount per year you get zero fee from my funds in any way shape or form.

Then you’ll see things really start to happen.

What period were you thinking of measuring this over ?

I would think you’ll end up with a lot of low risk, low return portfolios ; or a lot of additional costs on hedging instruments.

I would rather see competition on fees than regulation, and I think it’s happening. Some fee structures are hard to get a grip on though (but it’s easier than comparing bank charges).

The Nats were the masters of unfunded public sector pensions, remember the interest-free loans to buy backdated service ? Hardly the moral high ground.

@cheetah: Hardly a meaningful problem either.

The implication that buy backs with ifls somehow immoral is ridiculous in the extreme. There were no taxes on company cars for example. That was just the way it was many years ago. At least we got value for money with our taxes which wrre lower too.

In those days civil servants were paid lower than the private sector; now the civil/uncivil service get paid on average 30% higher for junk service.

What is your gripe?

@pacaratac

It struck me as ironic that the Nats would have encouraged individuals to provide for the future when their own policy was precisely to ‘spend today and worry about tomorrow when it comes round’.

I’m not sure who the ‘we’was who got value for money from taxes then, quite a select group ? And taxes were lower, seriously ? In the mid 80s the corporate rate was 50%, the top income tax rate was 42% with a separate table to tax blacks at higher rates, a third of dividend income was taxable, there was a thing called UPT to induce private companies to declare dividends… Fringe benefits tax had been introduced by then. Civil servants may have been paid less in basic salary terms, but there were some cushy benefits in the package to compensate.

None of which excuses the current disgraceful regime, but your glasses are rose-tinted with respect to the past.

In the mid 80s (as compared to 1948 to 1990 = 42 years) the anc and happy socialists had encouraged bans and premature capital repayments which were hardly business as usual activities. There was a border war to be financed. Maybe if you did not have blood relatives in SWA at thetime it meant zero to you but to others it was a big deal. Compare apples with like cheetah.

Cushy benefits huh? Maybe like the IFLs then? Hoist/petard?

Just where do you get spend today and worry about tomorrow as a policy? That is the policy of socialists.The view of irony is limited to yourself.

Today we are supposed to have a better life for all

lol.

BTW I loved my rose tinted glasses; today difficult to see out of them for all the filth around.

So be it. But don’t ask the State to look after you in old age.

In my entire living years I never heard anyone asking the state to look after them. Not in my family maybe in yours.

The 17 million poor people waiting for their April social grant (and who may not get it because of a stupid Minister) are not asking the state to look after them?

My 2c: at less than R40k per month your focus should be on increasing income rather than just cutting expenses in order to build savings. At above R40k, not saving enough for retirement is just financial illiteracy.

Maybe you are just illiterate. There are some 17 million (and counting) asking “the state” to look after them. But then again you and your family are a cut above the rest!

You think exactly like the stupid government. The 17 million are asking for a living, preferable a job. In the absence of which they have no option….. get that through you “literate” scull. A many with a job does not need a social grant and an aged citizen does not need a social grant if he had a lifetime of a working life… instead of spending R140billion a year on social grants why don’t you spend it on creating jobs or stimulate economic activity to get people out of grants into active economic participation… that’s to big a vision for you to understand neh!….. Who actually is illiterate, them or you?

The 17 million are not people of working age/ability. They are those who qualify for child grants, disability, or old age grants. The old age grants include many who were disadvantaged by apartheid to the extent they had no chance to provide for their old age. Unfortunately, the old age grants also include many currently retiring who, even though they have have retirement savings albeit based on low earnings, CHOOSE to take their those savings in cash and spend them on upgrading lifestyles, because they say that they will not qualify for the grants if they have pension income above a certain amount. Anyone who has been closely involved in Employee Benefits can tell you that.

This twit states that 25% of people don’t believe they will reach retirement age as if this is wrong, he should speak to his actuaries. This is a fact and NOT a belief, average life expectancy for a South African male = abut 58.7 years I believe and 65.4 for a female as I recall.

This article has gotten a few people hot under the collar. The reason people cash in early is two fold. 1. They are heavily indebted and under pressure to meet obligations. 2. They have no faith in the retirement industry. For number 1 above, just get you debt under wraps. No need for big cars, fancy holidays etc. pay off credit cards every month, pay cash for everything except your house. Sell all your cr@p, sort your finances out!

Regarding number 2. I overheard a broker this week at a coffee shop bragging to a friend/colleague that he had just done an annuity investment for an old lady of around R3mil and that his “comm” is R56k! He is charging R56k for filling in a few forms with the client. Robbery! Don’t rely on your pension for retirement and especially don’t rely on a broker. Make your own arrangements using a portfolio of income producing assets like TSFA’s, RSB’s, shares, property, bonds, businesses, royalties, cash etc. If you don’t have the discipline to do these two things, then its your own fault- It is because of your laziness that investment advisors are stealing your money.

You are absolutely correct. DEBT is killing people and many people from my background where previously financially ilitirate so they are slowly realizing that brokers commissions are ridiculously high and over 30 years or more its quite significant. Another reason is people are losing confidence in the country and dont think a long term investment is ideal.

Some really interesting insights from all these comments!

The problem is tying up money while the country is sinking, with zero growth and serious increases in the cost of living.

However, I do believe the tax free savings accounts is an incredible incentive for young families to take advantage of. Pumping money into low cost equity type ETF’s that will compound over decades can turn into millions for couples and their kids. And you can cash in anytime and bolt if needed.

Pumping 27.5% pre tax income into retirement is another great incentive, but in the current situation we find ourselves in I don’t want my money tied up till I’m 55yrs old before I can access it.

So invest wisely across different asset classes. Not saving at all is out right reckless and you’ll be doomed.

The retirement crisis is in a large measure the result of the switch from defined benefit to defined contribution funds. This move, as I recall was pushed by the trade unions and embraced enthusiastically by corporates, which couldn’t wait to offload their responsibilities towards their employees. The result is that people can get their hands on what they think is a small fortune before they retire. Of course, the asset management industry, along with the life assurers, love DC funds too, because they mean lots of fees for asset management and advice when people have to buy a pension. If you want to solve the retirement crisis, go back to DB funds, which combine compulsory preservation with a guaranteed pension at retirement.

Compulsory preservation was hardly a feature of DB funds either ! Typically if you changed employment you lost a big chunk of your fund through vesting tables and nominal returns on your own contributions (one of the major reasons for fund surpluses and the subsequent row over who was entitled to them). Withdrawal benefits (after sufficiently long service) were determined by opaque (and expensive) actuarial calculations, usually erring on the side of caution. Pensions weren’t really guaranteed, as pension liabilities were often not fully funded – it isn’t practical for contributions to be as volatile as market returns. And of course the asset management fees were always there, just not visible.

DC funds aren’t perfect but they have huge advantages in transparency – you can see your piece of the pie – and are able to accommodate a degree of personal choice.

Maybe the long-term solution to the issue is financial education from a fairly early age, so that financial decisions and their consequences become better understood and a culture of personal responsibility can be developed ; but that would take a generation or more. Meanwhile in a country with such huge income disparities, one-size-fits-all legislation/regulation is unlikely to get general support.

Fees are killing off retirees’ ability to live with enough in later life.Brokers/advisors who do this should be charged (and arrested) as criminals for profiteering.Outrageous.

Moneyweb webmaster:typo – meant to say: HIGH fees…
Thank you.

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