You are likely to face a financially stressful retirement if you retire early, by choice or because your employer forces you to take early retirement as part of a retrenchment programme.
If you planned to retire at 65, but you retire just five years earlier, your monthly pension could be 27 percent lower if you started saving at the age of 20. If you started saving at 30, your pension could be 30 percent lower, and it could be 52 percent lower than the pension of a person who saved from the age of 20 and retired at 65.
Retiring 10 years earlier than planned could reduce your monthly pension by 47 percent if you started saving at the age of 20. If you started saving at 30, your pension could be reduced by half if you retire five years early, and it could be 67 percent lower than the pension of a person who saved from 20 to 65. (The calculations take inflation and salary increases into account.)
These startling figures were provided by actuary Dwayne Kloppers, of the research and product development department at Alexander Forbes Financial Services.
The research comes against the background of:
* Many people being forced into early retirement by their employers, often as much as 10 years early;
* Employers lowering the age at which employees must retire by three or five years; and
* Employees voluntarily taking early retirement.
Most retirement funds make it mandatory to retire between 60 and 65, but allow members to take voluntary retirement from 55.
Cape Town lawyer Jason Whyte of Cheadle Thompson & Haysom says employers cannot unilaterally force you out of the door or change your retirement age (see “Your employer can’t unilaterally change your retirement age”, below).
Kloppers says whether your retirement savings are adequate is measured mainly by the percentage of your final salary that you receive as a pension. This is known as the replacement ratio or rate.
The generally recommended replacement ratio is between 60 percent and 75 percent.
Depending on various assumptions, such as how much you save as a percentage of your income and the type of pension you purchase, it is expected that your replacement ratio will be 62 percent if you start saving at 20 and retire at 65.
Early retirement has a big impact on your replacement ratio. For example, you can expect a replacement ratio of 45 percent if you retire at 60, instead of 65. If you retire 10 years earlier, at 55, you can expect a ratio of just 33 percent.
Starting to save later in life also has a significant effect on your replacement ratio, Kloppers says. For example, if you start saving at 30 and retire at 65, you can expect a replacement ratio of 42 percent, which is significantly lower than the 62 percent you can expect if you start saving at 20.
Kloppers says if you are asked to take early retirement, if your retirement age is lowered, or if you want to take early retirement, you must establish whether your retirement savings will be sufficient to provide you with an income for the rest of your life.
He says that lowering your retirement age by just three years, from 65 to 62, has a major impact on how much capital you will save for retirement. For example, if you start saving at 20 and your retirement age is lowered by three years, your replacement ratio will decrease by 11 percentage points. If you started saving at 30, your ratio will decrease by eight percentage points, and your ratio will be 28 percentage points lower than the person who started saving at 20.
The list below provides an example of how your expected initial monthly pension falls as the number of years during which you save for retirement decreases. It assumes you start to save at 20 and that you are earning R10 000 a month when you retire.
After 45 years: R6 200
After 40 years: R4 500
After 35 years: R3 300
After 30 years: R2 400
After 25 years: R1 700
After 20 years: R1 200
Kloppers says the examples assume that you saved 15 percent of your gross income, received a real (after-inflation) average return of 4.5 percent a year, and have a partner four years younger whose pension will reduce by 25 percent when you die.
He says your pension will be significantly lower if you retire early, because you will save less, you will not benefit from compounded returns on your savings for as long as you could have, and your retirement capital will have to sustain your pension for longer.
Kloppers says that, on average, people are living longer. The average lifespan of a man who retires at 65 is 18 years, and it is 22 years for a woman. If you retire at 55, you can expect, on average, to live for another 27 years if you are a man, or 32 years if you are a woman.
If you retire early and live longer than average, you could spend more of your life in retirement (when you have to depend on your retirement savings to generate a pension) than you spent working (when you build up your retirement savings).
Kloppers says how long you live in retirement will significantly affect your pension. For example, if you retire at 65 after starting to save at 30, your average replacement ratio will be 42 percent, but if you started saving at 20 and retire 10 years early, at 55, your replacement ratio will be 33 percent. Although in both cases you saved for 35 years, your pension will be lower if you retire at 55, because you will be paid a pension for longer.
The implications of the research are clear Kloppers says: you must start saving as soon as possible for retirement and you must save as much as possible (see “Bigger incentive to save”, below).
He warns that if you have not saved enough to maintain your standard of living in retirement, you must be wary of using a pension structure that will provide you with a high pension initially, but will result in the buying power of your income reducing the longer you spend in retirement. This could leave you destitute.
YOUR EMPLOYER CAN’T UNILATERALLY CHANGE YOUR RETIREMENT AGE
If the age at which you must retire is set in the rules of your retirement fund and/or your contract of employment, your employer cannot unilaterally change it, Cape Town lawyer Jason Whyte, of Cheadle Thompson & Haysom, says.
Whyte says the date on which you must retire is referred to as either an “agreed” retirement date or a “normal” retirement date.
* An agreed retirement date requires an employer and an employee to agree on a retirement age.
Typically, it will be included in the contract of employment. It could also be the result of a company’s employment policy or a collective bargaining agreement with a trade union, or it could be set by the rules of the retirement fund to which the employees and the employer belong.
An employer cannot unilaterally change an agreed retirement date at a later stage, because this would constitute a breach of the existing agreement, Whyte says.
* A normal retirement date is where there is a general consensus within a business or an industrial sector on the age of retirement.
Whyte says “normal” is an “extremely nebulous term”. The Labour Appeal Court has found that “normal” should be understood as it is defined in the dictionary, and that an employer cannot unilaterally impose a normal retirement age.
However, the rules of your retirement fund can be amended to change your retirement age.
Whyte says that problems can arise if the retirement age set by the rules of your retirement fund is different from the one in your employment contract. How the conflict is resolved will, to a large extent, depend on how the contract and the rules are worded.
“If the fund’s rules are incorporated into the contract of employment, either expressly or by implication, the rules will probably trump the contract of employment, but only if the relevant rule post-dates the contract of employment. In other words, if the rules stipulate a retirement age of 60, but the employee subsequently enters into an employment contract that states 65, then the contract of employment would trump the rules, in the sense that the employee would be entitled to work until 65. This may, however, result in the parties ceasing to contribute to the fund for the five years between 60 and 65.”
Whyte says an employer may not compel an employee to take retirement on a date other than the normal or agreed retirement date. “To do so would amount to discrimination on the basis of age and would thus automatically be an unfair dismissal as contemplated by the Labour Relations Act. It might also contravene the rules of the retirement fund.”
Whyte says section 187(1)(f) of the Labour Relations Act provides that it is automatically unfair and discriminatory to dismiss an employee on account of his or her age. However, section 187(2)(b) of the Act provides that a dismissal based on age is fair if an employee has reached the normal or agreed retirement age.
If your employer forces you to take early retirement, you can ask the Commission for Conciliation, Mediation and Arbitration (CCMA) and the Labour Court for an order of compensation and/or reinstatement.
A compensation order can include the payment of back pay from the date of dismissal, or if the dismissal was automatically unfair in terms of the Act, you can claim compensation to a maximum of 24 times your normal monthly remuneration.
Depending on the rules of the fund, your employer might also have to pay any retirement fund contributions that it did not make from the date on which you were dismissed.
A claim for an automatically unfair dismissal must be referred to the CCMA (or the relevant bargaining council), and if it cannot be resolved at the CCMA, to the Labour Court.
If your employer contravenes the rules of your retirement fund, the Pension Funds Adjudicator will be able to grant relief, which includes ordering your employer to pay any outstanding contributions due to the fund.
BIGGER INCENTIVE TO SAVE
As of March 1 you have been entitled to claim a tax deduction of contributions to a tax-incentivised retirement fund of up to 27.5 percent of your taxable income or remuneration, whichever is higher. The deduction is capped at R350 000 a year.
The new limits apply to pension and provident funds, as well as retirement annuity funds.
Any employer contributions to your retirement fund are added to your taxable income, but can be offset by the deduction.