The retirement landscape in South Africa is characterised by two pension systems: an advanced formal pensions sector and a means-tested social security system. However, a concern raised by actuary Rob Rusconi is that of the large ‘uncovered gap’ between these two systems: those individuals who benefit from neither
The biggest systemic issue, given South Africa’s high unemployment rate, is that the majority of our population is forced to rely on a state old-age grant of only R1 690 a month. Further to that, there are many of us privileged enough to tap into a formal pension scheme, but foolhardy if we think that that alone might be enough. I am not an actuary. I cannot tell you how much is enough. But I can say that the more I read, the more convinced I am that you need more than just your employer’s default retirement fund.
Many of our local investment and insurance groups have done preliminary research in this field. Old Mutual’s Retirement Monitor showed a low savings trend among its respondents owing to a large increase in the percentage of income spent on consumption or living expenses. The most common reason given for not contributing to any retirements savings was ‘I cannot afford it’.
National Treasury estimates that only 6% of South Africans will be able to replace their full income at retirement and maintain their lifestyles. And what makes it worse is that our statistical life expectancy just keeps shifting upwards. Therefore, the quantum of savings required after retirement could be much greater than expected.
National Treasury has also stated that one of the primary reasons why we reach retirement with insufficient savings is leakage, in other words not re-investing our retirement savings when changing jobs (I admit, I am guilty of having done this). An Old Mutual survey found that 61% of members who had changed jobs in the past 15 years withdrew some of their retirement benefits in cash. The occurrence of cash withdrawals was higher when the change in job was not voluntary, in other words because of dismissals or retrenchments. While it is tempting to state that the rules that allow us to withdraw our pension fund accumulations prior to retirement impact our retirement wealth negatively, what else can we do when the cost of living keeps increasing?
Let us break it down. Start by assessing who you are in this story. In other words, do an assessment for yourself. Once you know where you stand, we can start talking about how to improve, or at the very least, work with that.
Please note that the author of this article is not a certified financial advisor in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. Accountancy SA and the author cannot be held liable for any loss (including indirect and consequential loss) arising from your reliance on the opinions given in this article. Should you nevertheless elect to rely on this article, you do so at your own risk and agree to indemnify Accountancy SA and the author from any loss or damage that you may suffer as a result.
IN SHORT
FinMark Trust and the South African Savings Institute (SASI) reported that 6,9 million of salaried South Africans did not have any long-term savings in 2015. Are you one of them? Simple probabilities show that there is almost a 2-in-1 chance you are. If not, and you do have long-term savings inclusive of retirement savings, have you ever done an assessment of whether those savings will suffice? If not (or if so, and you did not heed the warning signs), are you prepared for significantly reduced standards of living in retirement? These are questions you need to be asking yourself.
Personal Finance Advisor
Gizelle Willows PhD, CA(SA) is an Associate Professor at the University of Cape Town
Please note that the author of this article is not a certified financial advisor in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. Accountancy SA and the author cannot be held liable for any loss (including indirect and consequential loss) arising from your reliance on the opinions given in this article. Should you nevertheless elect to rely on this article, you do so at your own risk and agree to indemnify Accountancy SA and the author from any loss or damage that you may suffer as a result.
