Lizl Budhram, Head of Advice at Old Mutual Personal Finance.
Findings from the Old Mutual Savings and Investment Monitor 2021, show that a third of those surveyed have no formal retirement products. However, just as there is no better time to plant a tree than today, it’s never too late to help your clients put retirement provisions in place.
The OMSIM 2021 report tells us as many as 56% of South African consumers are experiencing overwhelming financial stress. In addition, 43% of survey respondents now fall in the sandwich generation, where they are financially supporting their immediate family as well as adult dependants, and extended family members.
Key for the sandwich generation is finding the balance between meeting their financial responsibility for others with the need to successfully save and plan for their own retirement. This is the only way to break the sandwich generation cycle so that the next generation will experience less financial pressure.
Financial advisers can help clients by:
- Helping them draw up a realistic budget and a plan to reduce debt so that they have funds available for saving.
- Using proper needs analysis tools that take affordability into account.
- Facilitating a retirement savings plan that the client understands and is committed to, so that they can be less financially dependent on their children in retirement.
Sometimes, there may not be sufficient funds available to make regular, monthly contributions towards a retirement savings product. The financial adviser can help by pointing the client towards making lump sum deposits into retirement savings plans, where possible. These lump sums could include unexpected windfalls such as performance bonuses or even tax refunds.
Speaking of taxes, your clients should be made aware of the tax benefits around retirement annuities. Contributions are tax deductible up to a maximum of 27.5% of your remuneration or taxable income or R350 000, whichever is higher. For example, if the client earns R500 000 a year and contributes R50 000 to a retirement annuity, they are effectively only taxed on R450 000.
In an environment where the economy is uncertain and job losses are rife, it is also vital to talk to your clients about their choices when they change jobs or leave an employer. They have the option to preserve their savings, either within the current company’s retirement fund or by transferring it tax-free to their new employer’s retirement fund or a preservation fund or retirement annuity fund. Unfortunately, many members cash out their full benefit, because they are unaware that there is the option to take a portion as cash and preserve the remainder, with the opportunity of one more – full or partial – withdrawal before retirement age.
The move towards poly-jobs or more than one source of income has also become far more common. Where multiple incomes were once confined to owning a second property and renting it out, people are now increasingly turning to their hobbies and skills to find ways to increase their income.
Many clients are hesitant to tie up money in savings products or to commit to regular payments when they are worried about their financial stability. Planning for any unexpected outcomes means taking advantage of flexible options such as:
- Premium protection, which covers their premiums if they are disabled and unable to continue working.
- Retrenchment cover – that pays out a set amount if they are retrenched.
- The ability to reduce or pause premiums for a set period to help them recover their financial footing, at which point they can resume the full premium payments. This ensures that savings or cover can continue with minimal disruption.
Talking about big numbers required for retirement savings tends to terrify consumers into inaction or a sense of hopelessness. A financial adviser who adopts a practical approach based on affordability is far more likely to guide his client gently into successful retirement planning.
Old Mutual Life Assurance Company (SA) Limited is a licensed FSP and Life Insurer.