According to a recent survey, many South Africans are not prepared for the financial consequences of retirement. Although it is important to save for retirement regularly and throughout your working life, preserving your funds when changing employers should also be at the top your list of retirement-saving do’s.
The 2018 Sanlam Employee Benefits Benchmark Survey found that retirement fund members are still no closer to their desired financial outcomes, while retired members are unable to maintain their pre-retirement standard of living.
A recent survey by recruitment agency Kelly found that 47% of South African employees have been in their current position for less than a year. What’s more, 36% identified their longest tenure with an employer as one to two years. The majority (44%) of respondents said they have had two to three jobs since they entered the workforce, while 29% said they have had four to six jobs. Changing jobs is to be expected in today’s environment.
The simple principle: you work so that you can provide for your family and your lifestyle, and you save so that you will have an alternative source of income that will continue to provide for your family and your lifestyle when you are no longer working.
One of the biggest problems in South Africa is that people cash out their accumulated retirement savings when they resign.
When changing jobs, your employer will usually ask you what you want to do with your retirement savings. You can either transfer them to another fund, such as your new employer’s retirement fund or a preservation fund, or take a portion (or all) of your savings in cash.
A 2015 survey found that two-thirds of people who leave their jobs cash out their retirement savings, and many of them use the money to pay off short-term debt. The long-term impact of this can be catastrophic.
The scenario in the graphic illustrates the impact of withdrawing your benefits. By withdrawing R261 972, Thembi has R1 million less at retirement, which translates into about R4 500 less income a month.
Although you can preserve your money in a retirement annuity fund or in your new employer’s retirement fund, many people want to be able to access their retirement savings if they need to. Preservation funds can be a good option for helping people to resist the lure of short-term spending, while allowing their accumulated savings enough time to grow tax-free.
A preservation fund is a personal retirement savings vehicle that allows you to preserve and grow your benefits in a tax-efficient way. They provide the flexibility of allowing you to make one withdrawal (of up to 100%, depending on the source) before retirement, subject to tax.
Selecting the best option for you is the first step, and a qualified financial adviser can help you to weigh up the benefits of each of the available options. Make sure that once you have preserved your money, you give it the best possible chance to grow at a rate above inflation, by investing in the appropriate underlying funds.
If you want to retire with enough savings to last for the rest of your life, you need to ensure you use as many of the levers available to help you reach your goal. Start early and save throughout your working life. But, most importantly, preserve your savings along the way – your future self will thank you for it.
Here are some more things you should know about preservation funds:
- You can retire from a preservation fund at any time after the age of 55. This allows you to “stagger” your retirement.
- There are two types of preservation fund. Provident preservation funds accept money from provident retirement funds. Pension preservation funds accept money from pension retirement funds.
- When you retire from a provident preservation fund, you may take your entire investment value as a lump sum or invest it in an annuity, or a combination of the two.
- When you retire from a pension preservation fund, you may take a maximum of one-third of your investment value as a lump sum. The balance of the investment value must be invested in a compulsory annuity. If your total investment value at retirement is less than R247 500, you can take the full amount as a lump sum.
- You cannot make ongoing contributions to a preservation fund.
- Your selection of underlying investments has to comply with the asset-allocation limits set by regulation 28 of the Pension Funds Act. The regulation 28 limits are designed to prevent investors from taking too much risk with their retirement savings. The asset-allocation limits include a maximum of 75% in equities, 30% in offshore equities and 25% in listed property.
Shreekanth Sing is the technical legal adviser at PSG Wealth.