Derek Pillay, Principal Consultant on Retirement Funding : Aon South Africa
The COVID-19 pandemic and resulting economic crises have severely hit the financial wellbeing of many across the globe, the impact of which is likely to be felt for the long term.
Even before the pandemic, many South Africans were already facing significant constraints in saving enough for their retirement. This trend has been exacerbated by the pandemic as workers face reduced earnings, either due to reduced work hours or retrenchment. This means a widening savings gap of what they will have, versus what they will need to make it through their twenty-odd years in retirement.
Closing this retirement savings gap is crucial amidst changing employee circumstances and new regulations. South Africa has a poor savings culture, with only an estimated 6% of South Africans who can afford to retire comfortably at age 65. The odds are that a significant percentage of SA’s retirees will outlive their retirement savings due to reduced savings and longer life expectancies.
We have seen thousands of employees who have had no choice but to pause or reduce their retirement contributions or cashed out their savings (upon retrenchment) to survive the financial devastation caused by the prolonged pandemic. Even once they’re able to resume contributions, it is typically at a reduced rate due to reduced income and competing financial priorities.
While the reason for the shift is understandable, it does have significant tax and benefit implications. Firstly, the most obvious outcome is that by reducing or pausing your retirement contributions, you reduce the end sum of your savings so you have less income to live off. Secondly, an overlooked impact is that by pausing or reducing your pension or retirement contributions, your taxable income increases, meaning that you are effectively being taxed more and getting less out than what was expected. These factors have a marked impact on the long-term prospects of your retirement benefit being sufficient to sustain you.
The realities remain however that for many, there simply are no other alternatives right now, and those who face severe financial constraints will have little choice in the trade-off between surviving today versus saving for the future. It is crucial to have the discussion with a specialist broker in the field who can advise you on what the long-term implications are and what action you need to take to get your retirement savings back on track and bridge the inevitable gaps as soon as you are in a position to do so.
The latest Taxation Laws Amendment Bill is set to come into effect on 1 March 2021. In a nutshell, the amendment bill has the following implications: Members of all retirement funds will only be able to take one-third of the total value of their retirement fund interest by way of a lump sum with the balance being taken as an annuity.
The restriction will only apply to amounts contributed to funds on or after 1 March 2021 and not to members who are close to retirement (55 years and older as of 1 March 2021); provided they remain in the same fund.
The change in regulation is widely welcomed by the industry. The main purpose of this regulation is to protect people’s retirement savings. In the past, you were able to encash 100% of your retirement savings. Individuals often squandered their retirement savings a few years after the actual retirement date, leaving them in a dire financial situation in their retirement years. Having access to the lump sum defeated the purpose of granting tax incentives in the first place, as the lump sum is severely taxed; whereas the first R7 000 on monthly annuity payments is tax free with the rest taxed as income.
The change in legislation will bolster efforts to get individuals through – and not only to – retirement. Many people only see the retirement age of 60 or 65 as their end goal, failing to understand that retirement can last 20 to 30 years, during which time they will need to sustain their lifestyles and needs based on what they have saved in their retirement funds. Its highly likely that during retirement, there will be money going out and nothing coming in, so prudent retirement savings and management today cannot be emphasised enough.
RETIREMENT PLANNING FOR LATE STARTERS
In the current job market, there is an increasing trend towards ‘Total Cost To Company’ (TCTC) when it comes to remuneration. Some employers offer company benefits such as medical and retirement contributions, while others pay the entire salary package to the employee, and the onus is on the employee to make provision for the healthcare and retirement funding of their choice.
Regardless of the model, getting your retirement plan and contributions set up as early as possible is vital. We often find that younger people place less emphasis on retirement contributions, whereas +45year-olds will consider the maximum contribution. If you have had a late start, there are a few important considerations if you’re planning on making up for a lost time:
- The maximum tax deduction you may make in a tax year is limited to the greater of 27.5% of taxable income and gross remuneration from your employer, subject to a ceiling of an R350 000 annual contribution.
- You can opt for an Additional Voluntary Contribution (AVC) on top of your set pension deductions from your salary, provided that it complies with the limit above. AVCs are flexible and can be adjusted to suit your financial needs and is a great vehicle for bridging the gap.
It is never too late to start working on your golden nest egg. You can start by making use of the support structures around you, including any employer-provided programmes. Engage with a specialist broker and/or financial adviser in the field on the best options available to you, no matter the stage of retirement planning you are at. Making sure that there are provisions in place for your retirement to maintain your standard of living ‘through and not to’ your retirement is essential.