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MONEY MARCH 2021
SAVING FOR RETIREMENT
OLD-GEN VS NEW-GEN RAs PROVIDENT FUND CHANGES | Freepik.com
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CONTENTS FEATURES 3 Options on where to live when you retire
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Covid-19 magnifies retirement crisis
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Consider the long haul when saving for retirement
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Old-gen vs new-gen RAs, and why it matters
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How provident fund withdrawal changes will affect you
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REGULARS Rands and Sense with Neli Mbara
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Fact File: Complaints to the Pension Fund Adjudicator 13 Money Basics with Martin Hesse: What you need to know about retirement funds
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Money Quiz 18 Planning Perspectives with Palesa Tlholoe
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Important contacts and links
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FROM THE EDITOR
As in all successful ventures, the foundation of a good retirement is planning – EARL NIGHTINGALE was an American radio speaker and author
CONTACT US PUBLISHER Vasantha Angamuthu vasantha@africannewsagency.com MONEY EDITOR Martin Hesse martin.hesse@inl.co.za DESIGN Mallory Munien mallory.munien@inl.co.za PRODUCTION Renata Ford renata.ford@inl.co.za BUSINESS DEVELOPMENT Keshni Odayan keshni@africannewsagency.com SALES Charl Reineke charl@africannewsagency.com Kyle Villet kyle.villet@africannewsagency.com ENQUIRIES info@anapublishing.com
IF I was Albus Dumbledore and could wave a magic wand over the South African retirement fund industry, I would eliminate the word “retirement”. Everything in the industry is geared towards our retirement … except it isn’t. Everything in the industry is geared towards our long-term wealth creation. We create wealth so that when the time comes and we are not able to work any more – whether that is at 55 or 85 – we have saved enough to live comfortably off the proceeds. But it’s about so much more: it is about improving our lives and the lives of our children by, for instance, investing in education, being able to afford life-enriching experiences, and having access to topclass medical care. As soon as a young person sees or hears the word “retirement”, he or she switches off. “Retirement – that’s decades away, at the end of my life. My life is just beginning. Why should I be concerned with retirement?” Replace the word “retirement” with “wealth” and the mindset changes instantly. “Wealth? Yes, I want to be wealthy. Where do I start?” If you are a young person at the start of your career, I have a suggestion: when reading the magazine, each time you see the word “retirement”, mentally replace it with the word “wealth”. So we would have wealth savings, wealth funds, wealth annuities… Everything will suddenly make sense. It’s not about getting to age 65 and then suddenly becoming redundant to society, surviving on what you have saved. It’s about approaching life in a whole new way: saving consistently, spending within your means without taking on unnecessary debt, investing wisely for the long-term. And making the most of (a) the generous tax incentives on retirement savings and (b) the magic of compounding.
Martin Hesse
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OPTIONS ON WHERE TO LIVE WHEN YOU RETIRE Retirement planning involves things apart from seeing to it that you have saved enough. As you approach retirement age, you will have to consider where you are going to live once you are retired and what you will do with all the spare time you will suddenly enjoy. Where you live will depend on your personal circumstances and preferences, but there are also practical things to consider, such as security and access to health care, which shouldn't be underestimated.
prove expensive to maintain, in which case you could downscale to a smaller dwelling in the same area. This would free up some capital that could boost your retirement savings.
1. STAY WHERE YOU ARE
CONS: Same old, same old; the family home may be too large; maintenance, insurance and rates expenses may be unnecessarily high; there may be security issues; no automatic access to health-care facilities or to frail care once you reach a certain age.
This may be the easiest and most practical option, but for some this would be too boring. If you are in a family home and your children have “flown the coop”, the house will probably be too big for you and may
PROS: You are part of an existing community of relatives and friends and have an established network of service providers, such as your family doctor. You are familiar with your surroundings.
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2. ESCAPE TO THE COUNTRY
You may be weary of the busy life in the city and yearn for a tranquil, edifying natural environment in which to spend your autumn years. This may be in an inland town in a scenic part of our country or a quiet spot on the coast – many Johannesburg retirees end up in a seaside town. You are also likely to free up some capital, as accommodation is likely to be cheaper, although groceries may be more expensive in a small town. PROS: A change is as good as a holiday – you can start this new chapter of your life in a place that invigorates your soul and may provide new opportunities, such as working for a local charity or learning a new craft.
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CONS: Your family members and close friends may be much further away (so you may see them less frequently) and you will need to establish a new network of friends and service providers. Living in a small town, there may be security issues, and there may not be a good hospital in the vicinity.
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3. MOVE TO A RETIREMENT VILLAGE
Retirement villages have become an extremely popular option for South African retirees who can afford the lifestyle they offer. Units may be bought under sectional-title ownership or the village may operate according to a life rights system, whereby you forego ownership for the right to live in a unit until your death, upon which your estate receives a portion of the purchase price.
PROS: Retirement villages offer a secure, stress-free environment where all property maintenance is taken care of. Many offer good health-care services, a frailcare facility for when you get too old to look after yourself, as well as numerous activities for residents, such as bridge, bowls, outings and social events. CONS: The monthly levies may be high. Residents may feel cut off from the world outside. Many old people enjoy having younger people and children around them, which they would miss in a retirement village. The village rules may be rigid, such as prohibiting pets.
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Covid-19 magnifies retirement savings crisis A recent report shows that three quarters of South Africans worry that they won’t have enough saved to retire on, but 70% expect to maintain their same standard of living in retirement, writes GEORGINA CROUTH South Africans are facing a long-term retirement crisis, which has been magnified by the pandemic – and women are most vulnerable. This is the scary message to emerge from the annual Retirement Reality Report by investment firm 10X, released in October last year. The report is based on a Brand Atlas survey of the lifestyles of 15.1 million South Africans with an income of over R8 000 a month. The findings are corroborated by National Treasury figures. 10X said a key issue that cropped up time and again in the reports was that people felt they could not afford to save for retirement, but they “really cannot afford not to save for retirement”. Before the pandemic, many were already treating retirement savings as a nice-to-have. Covid-19 has magnified the crisis: in the 2020 report, which was conducted during the early part of the pandemic, almost half (49%) of respondents said they had no retirement plan, compared to 46% in 2019. “Forty percent believe they can save for retirement
in less than 25 years, but they fail to understand that the first 15 years of employment are really important in guaranteeing a successful retirement outcome,” 10X’s head of investments, Chris Eddy said. “People aren’t saving enough. It’s not just about having a plan – that alone won’t solve the problem; it’s about understanding the drivers.” Worse is the fact that more than 60% of South Africans cash in their pension savings when they leave a company. Eddy says the report shows that people want to preserve their lifestyle but have not thought through the implications of not saving: 75% worry they don’t have enough to retire and 77% say they will need to continue working in retirement – and yet almost 70% expect to enjoy the same standard of living in retirement. “The 49% who have no plan say they don’t earn enough money to save, but in fact they are prioritising their current lifestyle at the expense of their future self. A 5% to 10% drop in lifestyle now will make a 50% to 90% change in retirement.
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“Eighteen percent say they don’t save because they don’t plan to retire – but given South Africa’s population dynamics, the flood of younger people entering the workforce – it makes it more difficult to defend that position in the long term.” Mica Townsend, 10X’s business development manager, says few respondents can say their plan is well-thought-out and executed: 20% have a plan, but it’s “a bit vague”. WOMEN ARE WORSE OFF The situation is worse for women: often their careers are interrupted by pregnancy and childcare, and the latest StatsSA data says women earn about 30% less than men (a 7% increase on last year’s data). “Fiftythree percent of women have no plan, versus 45% of men. Twenty-seven percent of men have a pretty good idea of their plan, but only 22% of women (can say the same),” Townsend said. “What makes the problem worse is that those women who are saving tend to do so in cash investments. They are conservative in nature.” More women identify as savers (32%) than men (28%) while 13% of women identify as investors as opposed to a much higher percentage of men (22%). “We know that simply saving your money is not enough: cash is not going to grow fast enough to give you a nest egg that you can survive on and won’t
keep pace with inflation,” she said. “What you really need is a high-equity or a well balanced diversified portfolio. You simply can’t just put that money in the bank. Women, typically, are not investing the assets that they need in order to grow their retirement savings.” Traditionally, women leave these decisions to a partner, instead of making financial preparations for themselves. “Once that person to whom you delegated those decisions is no longer around, how are you going to manage?” HARD LESSON The pandemic, Eddy said, fast-forwarded South Africans to a potential future where they no longer have an income and little-to-no savings to fall back on. But lessons can be learnt from how a crisis can cause a dramatic lifestyle downgrade. “If there is to be a positive from our state of economic and financial disaster, perhaps it is the increased awareness of our vulnerability to life’s unexpected broadsides,” he said. “In giving a glimpse into the future, of what it feels like to be suddenly living off a low income and the strain of great financial insecurity, it may finally convince people that they cannot afford to ignore planning for retirement.”
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CONSIDER THE LONG HAUL WHEN SAVING FOR RETIREMENT JANET ESTERHUIZEN says you need to balance current needs and wants with your future quality of life. With 30% of South Africans without retirement savings and many contending with retrenchments and rising debt, the picture looks bleak. Planning for retirement should ideally start with your first salary; however, it is never too late to start where you are. Setting aside money for your retirement each month is not enough to ensure you meet your retirement needs. Just as life is ever-changing, your retirement plan should adjust as your age, income, needs and circumstances change. It therefore requires a more strategic approach, determined by your life stage. The fact that retirement can feel quite abstract (planning decades ahead from your current reality) can make it hard to stick to a disciplined savings habit. But it’s critical to apply the principle of delayed gratification, and to recognise that there’s a trade-off between meeting all your needs and wants today and the quality of your future. Retirement planning is about the long term – it stretches over decades, involves choosing from a range of investment vehicles, is affected by a range of factors outside of our control, and it is different for everyone. When you started saving, whether and to what extent you live above or below your means, your family set-up and support – all affect what an appropriate retirement plan may look like for you.
Nevertheless, each life stage generally requires a certain strategy. As a rule of thumb, here’s what do at each juncture: In your 20s: You should start putting away money for your retirement from your first salary, aiming to save between 10% and 20% of your monthly income. In your 30s: If you have started saving in your twenties, it is important to stick to your savings plan and make an upward adjustment to your contributions as your income increases. If you haven’t started saving yet/started saving recently, saving for your retirement should now be a priority. By re-evaluating your budget to see where you can cut down on expenses and/or if necessary, you can make changes to your lifestyle to free up money for your retirement. In your 40s: If you have been saving diligently since your twenties, the same principles apply. It is also advisable to watch your lifestyle – do not automatically adjust your lifestyle as your income increases as you move into more senior positions.
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In your 60s: Don’t stop working if you don’t have to and if you are able to work for longer. Research is showing a steady increase in life expectancy. So, the longer you can delay starting to live off your retirement savings, the better. When you do retire, cash in the minimum that you need, so that your savings can continue to grow.
savings. Transfer them to a preservation fund or your new employer’s retirement fund. Lastly, if you receive any extra income – for example, an annual bonus from your employer – get into the habit of adding as much as you can to your retirement savings. Retirement planning on your own will not only be time-consuming and stressful; it is also highly unlikely that you will reach your goal. An accredited financial adviser has the expertise and tools to help you determine how much to save each month, where to invest your savings, achieving cost- and tax-efficiency, and guiding you through adverse times, ensuring an optimal retirement outcome.
Changing jobs: If you change jobs during your career, do your best to not cash in your retirement
Esterhuizen is provincial head at Nedbank Financial Planning.
In your 50s: Start thinking about your retirement and what your expenses may look like. Keep in mind that some expenses will decrease (such as the cost of commuting to work) while other expenses will increase (such as medical care).
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JUST AS LIFE IS EVER-CHANGING, YOUR RETIREMENT PLAN SHOULD ADJUST AS YOU AGE...
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OLD-GEN VS NEW-GEN RAs, AND WHY THEY MATTER A retirement annuity (RA) is an essential product for saving for retirement, if you are not saving enough in an employer-based retirement fund. But there are two distinct types of RA and you need to know the differences before taking the leap. AN old-generation retirement annuity fund (RA), which is policy based, is vastly different from a newgeneration unit-trust based RA. Abdallah Moosa, a planner and actuary at Cape Town-based wealth management company Fiscal Private Client Services, says RAs fall under the category of retirement funds (including pension and provident funds). “They are essentially a ‘personal retirement fund’, and contributions are typically ad-hoc. The contributions are tax-deductible up to a prescribed limit. In addition, investment growth on fund assets within an RA are tax exempt.” He says there are two broad types of RAs: policy-based RAs, which are underwritten by a life insurance company, and unit-trust based RAs,
which are typically offered by an asset management company or investment service provider. “It is vital for investors to understand the differences between the two, regardless of whether a financial adviser is in the mix,” Moosa says. What you need to know about an old-generation RA ♦ With a policy-based RA, you enter a long-term contract with the insurer, detailing the frequency and amounts that need to be invested over the policy term. ♦ A penalty is typically payable should you change the premium amount, or a termination fee is levied should you wish to stop any further payments. ♦ The minimum policy term is typically five years, which means that you need to be sure that they will be able to make all payments, along with agreed
11 annual increases for the full term, before signing a contract. “This is a significant commitment for most people and should be considered carefully,” Moosa says. Typically, this RA has a built-in commission structure to remunerate the person selling the product. This adds to the cost of the RA along with other distribution-related expenses, such as marketing. ♦ These expenses are recovered from the RA investment over time and, for this reason, on termination or lapse of the policy, the provider typically recovers these expenses using the termination penalty. Moosa says: “Many old-generation RA products incorporate a loyalty bonus structure, which is added to the benefit payable when the investment matures. This incentivises you to continue contributing until the end of the policy term. Some providers will withdraw the bonus should you decrease or stop making payments. This, along with the termination penalty, acts as a disincentive for stopping prematurely.” An examination of the product literature and fee structures for a number of insurers have shown that investors may be funding their own “bonuses” through higher fees, which are typically shown under the “Other” line item of the effective annual cost (EAC) table. An EAC report details all the fees and costs throughout the investment term and can be requested from any provider. There are some insurers whose bonuses give investors back much more value, leading to negative fees in the EAC table. These clients would end up paying less fees, leaving them with more investment growth. This is typically achieved where the insurer
uses a shared-value model, through a rewards programme for members. WHAT YOU NEED TO KNOW ABOUT A NEW-GENERATION RA ♦ New-generation unit-trust based policies are a lot more flexible, cost-efficient, and straightforward. ♦ There are no contracts or any commitments. ♦ You can make once-off or regular investments, as long as the amounts meet the provider’s minimum investment requirements. ♦ Contributions can be amended, paused, or stopped at any time. This is especially important if your circumstances change, such as being retrenched. All fees, charges or commissions are typically paid on an as-and-when basis only, meaning there are no termination or other penalties. ♦ You can also switch providers at any time without any penalties. “An examination of the EAC tables for a number of new-generation RA providers show them to be far cheaper than policy-based RAs. These providers tend to operate with very low administration costs, and therefore the bulk of the on-going cost will typically come from investment manager costs,” says Moosa. In conclusion, he says: “Since your RA will typically have a long investment term, especially if you start contributing at a young age, it’s important to have a good understanding of your ongoing costs. It is also vital to understand how and who will be managing the underlying investments, as ultimately this will impact how much money you will eventually have at retirement.”
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Rands & Sense
The effects of job-hopping on your retirement
Neli Mbara
Job-hopping – defined as spending less than two years in one position – is a controversial subject. It can be an easy path to a higher salary, but can also be a red flag to prospective employers, not to mention to the detriment of your financial goals if you are cashing in your retirement savings every time you make a move. When changing jobs, whether it be once a year or once every decade, you have to make decisions regarding career growth and retirement plans which affect your long-term financial plans. One of these decisions is “what to do with my retirement fund?” For many people, the first thing that comes to mind is using their pension money to pay off their debt. Alexander Forbes Member Watch statistics show that 91% of members do not preserve their retirement savings when changing jobs. As we are living in times where most household income is used to finance debt, most people use job-hopping to gain access to their retirement savings, and use this money to pay off debt. However, a quick fix and instant gratification comes at a price, which in this case could be a delay in your retirement plan. Your retirement savings are simply for that, your retirement, to pay you an income once you stop working. Early access of your retirement savings can result in: Not having enough money at retirement – most of us are already not saving enough for retirement. ♦ Robbing yourself of the compound interest you could have earned from the investment. ♦ Never making up the lost benefit. ♦ Creating a bad habit that will prevent you from achieving your retirement plan and desired income at retirement. It is easy to cash in your money from a retirement fund at resignation but it is much harder to make up for the lost benefit (capital cashed in plus interest). Calculations show that, depending on your retirement age and investment time horizon, for you to make up the lost benefit you will probably need to double your retirement fund contributions. Since only 6% of the South African population are reported to have accumulated enough to retire comfortably, without having to sacrifice their standard of living, you will most likely have to invest much more towards your retirement fund to make up for the lost savings. Therefore, leaving your retirement savings invested and preserved in a preservation fund is the recommended option when changing jobs, as this keeps you committed to your retirement plan. Changing jobs is a life-changing event, and it is therefore important that you seek advice from a professional financial adviser who will guide you in your retirement planning, ensuring that your retirement needs are taken care of, by providing solutions that help you to ensure your financial well-being. Mbara is a Certified Financial Planner at Alexander Forbes
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LE FACT FI
Complaints to the Pension Funds Adjudicator THE FOLLOWING INFORMATION IS FROM THE OFFICE’S ANNUAL REPORT FOR THE FINANCIAL YEAR ENDING MARCH 2020
COMPLAINT STATISTICS ♦ Complaints received: 11 179 (11 399 in the previous year)
♦ Complaints disposed of: 9 602 (10 287 in the previous year)
♦ Formal determinations: 4 991 (5 319 in the previous year)
♦ Cases found in favour of complainants: 93.6% How complaints were received
♦ Email: 48.2% ♦ Walk-in: 31.7% ♦ Website: 7.1% ♦ Letter: 6.6% ♦ Fax: 6.3%
MAJOR REASONS FOR COMPLAINTS
♦ Withdrawal benefits (60% of complaints): Many
employees leave service and expect their benefits to be paid to them, only to find that their employers have not kept up to date with paying contributions into the fund on their behalf. Another reason is employers/funds intentionally withholding benefits, which may be lawful in certain circumstances but unlawful in others. ♦ Benefit statements (10% of complaints): Funds are required to send members an annual benefit statement. By receiving such a statement annually, members would quickly know whether their contributions were being paid into the fund or not. Many funds are still failing to do this.
CASE STUDY: FAILURE OF EMPLOYER TO PAY CONTRIBUTIONS TO FUND Mr M was employed by Tactpro Protection Services in 2016 and 2017. When he left the company, he was not paid his withdrawal benefit by the Private Security Sector Provident Fund (PSSPF). He provided a copy of his pay slip for June 2017 which reflected a provident fund deduction of R226.85. The PSSPF submitted that Tactpro had been in arrears in paying employee contributions over to the fund. Tactpro acknowledged that contributions were deducted from Mr M’s salary, but were not paid over to the PSSPF. This was because its clients, which included a municipality, were in arrears with their contract payments, which led to a situation where it could not honour its statutory commitments to its employees. In her determination, the adjudicator, Muvhango Lukhaimane, said Tactpro had undertaken to remedy the situation and had requested a reasonable time to do so. “The non-payment of invoices by clients is a real issue in this (security) industry and it normally results in the employer being unable to honour its statutory duty to pay contributions in respect of its employees. Thus, it is a systemic problem in this industry, which prejudices both employer and members … and affects the final benefit payable upon exit from service.” Tactpro was ordered to pay to the PSSPF the arrear contributions together with late payment interest. The PSSPF was ordered to pay Mr M his withdrawal benefit.
♦ Report released in January 2021.
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MONEY BASICS
with MARTIN HESSE
What you need to know about retirement funds DO YOU know that all retirement funds are governed by the Pension Funds Act and subject to a unique set of regulations designed to protect you and your dependants? TYPES OF RETIREMENT FUNDS You get occupational funds (funds linked to one’s employment), preservation funds and retirement annuities (RAs). ♦ Occupational funds may be: a) Defined-benefit funds, in which your benefit is guaranteed according to a formula that takes into
account what you earn and your years of service (a good example is the Government Employees’ Pension Fund); or b) Defined-contribution funds, in which there is no guaranteed benefit when you retire. The amount owing to you will be your total contributions plus investment growth on those contributions. Most private-sector funds are now of this type. Occupational funds may be pension funds or provident funds. Traditionally, provident funds were funded with after-tax contributions, but recent legislation changes have ensured that, from March 1,
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MANAGEMENT OF THE FUND The fund must have a board of trustees, and occupational funds must have employee representation on the board. The trustees must act in your best interests and manage your money prudently. Funds usually outsource day-to-day administration to retirement fund administrators. This involves keeping tabs on members, their contributions, the investments and fund balances. Your fund is required by law to provide you with an annual statement of your balance, and it should also indicate whether you are on track to retire comfortably. New regulations require funds to communicate with you through counselling or written information when you begin or leave a job to ensure you are fully aware of your options and the possible tax and other consequences of those options. Your employer does not have direct access to the fund. However, on leaving your job your employer may withhold some or all of your benefit as compensation if you have been found guilty of theft or fraud against the company. CONTRIBUTIONS Your contributions to a company pension or provident fund will come off your salary or wages. Your contribution may be supplemented by a contribution from your employer, which is considered a fringe benefit for tax purposes. All contributions to retirement funds, including any you make to an RA, are tax-deductible up to 27.5% of your income up to R350 000 a year. Your employer is required to pay contributions over to the fund each month. If it is not doing so, you need to complain to the Pension Funds Adjudicator (see page 20). The Act requires that the fund’s board of trustees is responsible for the collection of contributions from employers. INVESTMENTS The Pension Funds Act places limits on investments into higher-risk assets such as shares. A balance needs to be struck between investing too cautiously, in which case your money won’t grow sufficiently, and taking on too much risk, whereby you could lose money.
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2021, there is virtually no difference between a pension and a provident fund. They may also be either stand-alone funds (a company- or union-specific fund) or umbrella funds, which house a number of employers in a single fund. ♦ Preservation funds are not linked to your employment. They are specifically designed as an investment into which to transfer your retirement benefit when you change jobs. ♦ RAs are like “private” pension funds. (See article explaining RAs on page 10.)
You may be offered a choice of underlying investments, failing which you will be put into a default portfolio, which would ideally be suitable for the average member. Many funds adopt a so-called “lifestage” approach: you are placed in higher-risk highgrowth investments when you are younger, and then transferred across to safer, lower-growth assets as you approach retirement, so that you are not faced with a sudden loss at the end of your career from which you can’t recover. Retirement-fund portfolios are not subject to any form of tax on capital or returns. BENEFITS As a member of a pension/provident fund, you may not access your accumulated benefits unless (a) you quit your job or (b) reach retirement age. On withdrawing your benefit, there are different tax structures depending on whether you are changing jobs or have reached retirement. The tax is much heavier on a withdrawal when you change jobs, and any adviser will strongly advise against “cashing in”. (See articles on pages 6, 8, 12 and 19). If you die in service, your benefit plus any group life insurance payout will be paid to your dependants and/ or nominated beneficiaries (people you have named on the beneficiary form). Who gets what is determined by the board of trustees after they have assessed who is in most need of the money. For example, if you have children from a previous marriage, they are likely to be considered, even if you have not named them as beneficiaries. Your savings in a retirement fund do not form part of your estate.
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HOW PROVIDENT FUND WITHDRAWAL CHANGES WILL AFFECT YOU MARTIN HESSE explains how changes to legislation relating to provident funds, which came into effect on March 1, will affect members of these funds.
Up until now there have been two distinct types of retirement funds offered by employers to their employees: pension funds and provident funds. Many company retirement funds offer both. Traditionally, the differences between pension and provident funds were that in a provident fund your contributions were from after-tax income (in pension funds it was from pre-tax income – in other words, your contributions were tax-deductible) and that on retiring from a provident fund you could take your entire benefit as a lump sum, unlike a pension fund, where two-thirds of your benefit had to be used to buy a pension. About a decade ago, the government embarked on an ambitious retirement reform programme, which was primarily aimed at getting people to save more for retirement and to preserve their savings when they changed jobs. The programme continues to this day. RETIREMENT FUND REFORM Some of the main changes to the
retirement fund landscape in the past several years were: ♦ Upping the tax-deductible amount for pension fund contributions from 7.5% of your annual income to 27.5%, with a ceiling of R350 000. This coincided with changes to how you were taxed on your income and employee benefits: retirement fund contributions your employer made on top of your own would now be considered part of your income. ♦ The introduction of the retirement fund default regulations. These were regulations under the Pension Funds Act that compelled retirement funds to be more proactive in ensuring that members knew what their options were on joining, resigning or retiring, and requiring funds to offer “default” investment and preservation options, which would automatically apply unless the member actively chose a different option. ♦ The harmonisation of pension funds and provident funds. This would essentially wipe out the differences between the two: provident funds would become
pension funds in their treatment of members’ contributions and withdrawals. Thus, contributions to provident funds were also made tax-deductible up to 27.5% of pre-tax income. However, on the second major change – the requirement that two-thirds of the benefits at retirement should be used to buy a pension (referred to in the industry as annuitisation) – the government came up against stiff opposition from the trade unions. It is this second change that came into effect on March 1, after a few years’ delay in which some concessions were made to the unions. CHANGES FROM MARCH Dolana Conco, regional executive of consulting at Alexander Forbes, says the changes for provident fund members are: ♦ Provident funds will have the same annuitisation rules as pension funds. This means that members will have to buy a pension (annuity) from a registered insurer with at least two-thirds of their retirement benefit, unless the total benefit is
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R247 500 or less. ♦ The changes will not apply to existing savings. Any provident fund balance saved before March 1, plus the future growth on this until retirement, will be “ring-fenced” – in other words, that part of your savings will not be affected and can be taken in cash on retirement. ♦ Members who were 55 years or older on 1 March will not be affected by this change at all if they remain a member of the same provident fund until retirement. “This means that the retirement benefit will be treated in the same
way as it is currently being treated when these members retire. If these members transfer to another fund, they will still have vested rights, but contributions and growth on this to the new fund will require them to buy a pension with two-thirds of their retirement benefit,” Conco says. HOW WILL THIS WORK FOR A MEMBER UNDER 55? Say you are 50 years old and have been contributing to a provident fund for 25 years, and on March 1 your accumulated savings was
R4 million. This portion of your savings will be ring-fenced. In 15 years you retire aged 65. Your total benefit at retirement is R9 million, of which R2 million is growth on the ring-fenced R4 million. The remaining R3 million is savings plus growth accumulated after the change. As a lump sum you will be able to take R6 million (ring-fenced R4 million + R2 million growth) plus one third of the remaining R3 million, for a total of R7 million. The remaining R2 million will have to be used to buy a pension.
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Money Quiz Test yourself on your financial knowledge
1. What does TER stand for in relation to unit trust funds? a) Total eventual return b) Total expense ratio c) Tax exclusion rate d) Top entry rate 2. Which one of these is not one of the four main asset classes? a) Equity b) Cash c) Futures d) Bonds 3. Who said “Once we realise that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes”? a) John Maynard Keynes b) Albert Einstein c) Warren Buffett d) George Soros 4. Which of these is not in the so-called FAANG group of hightech stocks a) General Motors b) Amazon c) Facebook d) Netflix 5. If the rand/dollar exchange rate is R15/$, and it changes to R18/$, how has the rand performed in dollar terms? a) Gained 20% b) Lost 20% c) Gained 16.7% d) Lost 16.7%
ANSWERS: 1b, 2c, 3d, 4a, 5d, 6d, 7a, 8b, 9c, 10c.
6. What is the maximum percentage that a retirement fund can invest in the equity market? a) 25% b) 40% c) 60% d) 75% 7. Who is the Pension Funds Adjudicator? a) Muvhango Lukhaimane b) Lesetja Kganyago c) Judge Bernard Ngoepe d) Adv Nonku Tshombe 8. At what age can you claim a secondary rebate on your income tax? a) 60 b) 65 c) 70 d) 75 9. Which government body is responsible for maintaining the stability of the banking system? a) The Financial Sector Conduct Authority b) The Department of Trade and Industry c) The SA Reserve Bank d) The SA Revenue Service 10. What is the threshold amount under which no duty is payable on your estate? a) R1 million b) R2.5 million c) R3.5 million d) R5 million
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Planning Perspectives
Retirement: don’t become a statistic
Palesa Tlholoe
Most of us will work for at least 35 years. That’s plenty of time to save for retirement, right? You’d think so, but the reality is that only about 6% of South Africans will be able to retire comfortably. How scary is that? The reasons are numerous: pervasive low income and retrenchments, a high debt-to-income ratio for the majority of the population, and a general lack of understanding about how retirement funds work. Don’t be part of the problem. Here are a few tricks to turn your savings situation around. DO YOUR SUMS In order to save smartly, you need to know how much you’ll need each month in retirement. The rule of thumb is 75% of your pre-retirement income, but this depends on so many lifestyle and other factors. Calculating the monthly amount is one thing, but you also need to work out how to get to that goal, by factoring inflation and investment growth rates into the equation. There are some complicated sums involved in a retirement analysis, which is why it’s best to consult with a professional. A Certified Financial Planner (CFP) will make sure you save the right amount each month to reach your retirement goal. START AS EARLY AS POSSIBLE Start contributing to a retirement fund as soon as you start working to give yourself as much time in the market as possible. The benefit of remaining invested for 30+ years is that you take advantage of compound interest – the interest you earn earns its own interest and your savings grow exponentially. Time in the market also allows you to invest in slightly riskier asset classes such as equity funds, which might fluctuate in the short term but will offer excellent growth in the long run. DON'T CASH IN WHEN YOU CHANGE JOBS If you’re still young and you resign from one job to start another, it’s tempting to draw the savings in your pension fund. Maybe you need the cash for your house, or you have a side hustle that needs a financial boost. Bad idea. Not only will you be taxed on the withdrawal, but you’ll set yourself back years in terms of growth. Rather transfer your pension or provident fund tax-free to a preservation fund, a retirement annuity, or your new employer’s fund. It’s important to choose the correct option based on your personal circumstances. Again, we recommend you seek the advice of a professional financial planner before you decide. TAKE ADVANTAGE OF THE TAX INCENTIVES There are very real tax benefits for saving towards your retirement. You can deduct up to 27.5% or R350 000 (whichever is lower) per year from your taxable income if you contribute to a pension fund, provident fund or retirement annuity. At the end of the day, saving for retirement should be a priority. A retirement fund is safe (it’s completely protected from your creditors if you pass away), it’s tax-efficient and it offers good growth. But most importantly, it gives you the peace of mind that you will be financially independent in your golden years. That’s priceless. And remember, a CFP professional can assist. You can find a list of planners at www.fpi.co.za Tlholoe, CFP, is co-founder and a wealth manager at Imvelo Wealth Solutions.
INFORMATION
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Here are sources that can help you with financial education, give you more information on savings and investments, and afford you recourse if you have a consumer complaint or a complaint against a financial services provider
FINANCIAL EDUCATION Financial Sector Conduct Authority MyMoney Learning Series https://www.fscamymoney.co.za South African Savings Institute #WaysToSave https://waystosave.co.za/ OMBUDSMAN & REGULATORS Ombudsman for Banking Services ShareCall: 0860 800 900 or phone: 011 712 1800 Email: info@obssa.co.za www.obssa.co.za CONSUMER ISSUES National Consumer Commission Toll-free: 0860 003 600 or phone: 012 428 7000 Email: complaints@thencc.org.za www.thencc.gov.za CONSUMER GOODS AND SERVICES OMBUD ShareCall: 0860 000 272 Email: info@cgso.org.za www.cgso.org.za
FINANCIAL ADVICE Ombud for Financial Services Providers phone: 012 470 9080 or 012 762 5000 Email: info@faisombud.co.za www.faisombud.co.za INVESTMENTS Financial Sector Conduct Authority ShareCall 0800 110 443 or 0800 202 087 info@fsca.co.za www.fsca.co.za LIFE INSURANCE Ombudsman for Long-term Insurance ShareCall 0860 103 236 or phone: 021 657 5000 Email: info@ombud.co.za www.ombud.co.za MEDICAL SCHEMES Council for Medical Schemes MaxiCall: 0861 123 267 Email: complaints@medicalschemes.com or information@medicalschemes.com www.medicalschemes.com
CREDIT OMBUD MaxiCall: 0861 662 837 or phone: 011 781 6431 Email: ombud@creditombud.org.za www.creditombud.org.za
RETIREMENT FUNDS Pension Funds Adjudicator ShareCall: 0860 662 837 or phone: 012 346 1738 Email: enquiries@pfa.org.za www.pfa.org.za
NATIONAL CREDIT REGULATOR ShareCall: 0860 627 627 or phone: 011 554 2600 Email: complaints@ncr.org.za or (debt counselling) dccomplaints@ncr.org.za www.ncr.org.za
SHORT-TERM INSURANCE Ombudsman for Short-term Insurance ShareCall 0860 726 890 or phone: 011 726 8900 Email: info@osti.co.za www.osti.co.za
TAX Tax Ombud ShareCall: 0800 662 837 or phone: 012 431 9105 Email: complaints@taxombud.gov.za www.taxombud.gov.za PROFESSIONAL ORGANISATIONS Fiduciary Institute of Southern Africa (FISA) phone: 082 449 2569 Email: secretariat@fisa.net.za www.fisa.net.za Financial Planning Institute of South Africa (FPI) Phone: 011 470 6000 Email: info@fpi.co.za www.fpi.co.za South African Institute of Tax Professionals (SAIT) Phone: 012 941 0400 Email: info@thesait.org.za www.thesait.org.za FINANCIAL DATA ◆For ◆ the latest financial market indicators, go to https://www.iol.co.za/businessreport/market-indicators ◆For ◆ the latest quarterly unit trust performance, go to https://www.iol.co.za/ personal-finance/collective-investments ◆To ◆ look up performance of a particular unit trust fund go to https://www.iol.co.za/ personal-finance/fund-look-up
