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VIEWPOINT: Why plan?

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“As many as six to seven million formal-sector employees have no access to any formal retirement planning or protection for their families on death or disability and rely on the state.”

Retirement reform is going to impact our businesses and employees, and with most employers still in the dark about the payroll consequences of retirement fund and tax reforms coming in March next year we recommend that companies prepare well in advance of the implementation date.

In the wake of the 2014 Budget Speech, National Treasury has released its “2014 Budget Update on Retirement Reforms” paper, a continuation of the process that has already been going on some years. What does it all mean?

First, employers may need to implement a mandatory system of retirement savings. Currently it remains voluntary for employers to offer staff a retirement plan with savings and risk benefits and many opt not to do so given the high costs and complexity associated with providing an employer-sponsored scheme. Consequently, as many as six to seven million formal-sector employees have no access to any formal retirement planning or protection for their families on death or disability and rely on the state.

For many small and even medium-sized businesses, as well as their employees’ take-home pay, this may be too much of an immediate cost shock. Therefore, you might consider starting small – but immediately – and building up with improved benefits and savings over a period of time.

Second, employees may need to contribute to their own retirement and preserve their fund if they switch jobs. Currently, employees resigning or withdrawing from a retirement fund may, and usually do, opt to take their accumulated retirement savings as a lump sum for lifestyle reasons instead of preserving it.

Retirement planning expert Nigel Willmott CFP says that “many employees view their retirement fund as a fall back emergency fund, occasionally even resigning just to access it or try borrowing against it for short-term financial relief”.

“While looting one’s pension as a lump sum payment may provide some short-term relief, in the long run it results in inadequate personal retirement savings and that individual becoming a potential burden on the state. These reforms may seem harsh to such individuals, but they will improve South Africa’s low national savings rate, and will indirectly help employees lift themselves out of the debt trap by denying them further access to credit or their accumulated retirement credits,” says Willmott.

For employees, the reforms will permanently remove the possibility of cashing in their future retirement savings – and incidentally risk cover – in favour of that new car, and thereafter hoping that a government pension will suffice in retirement. With this change, financial planning and education earlier in life will become essential.

Whether or not employers have a retirement benefit structure in place, you need to revisit this question now before reform forces your hand. ❐

Author: Mike Lledo CA(SA) is the CEO at Consolidated Financial Planning