Seatbelts matter on the journey to saving for retirement

FRAN TROSKIE Investment Research Analyst, RisCura

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At present, as pension fund members, we can withdraw a full lump sum from our retirement funds at any time during our lives. We can do this when we are retrenched, or when we resign, or (flippantly) when we want to buy a fast car. The legislation underwent extended public comment that closed in February, proposing that members can only withdraw one-third of their pension savings to use at their discretion. The remaining two-thirds will remain invested in the designated pension vehicle.

The legislation aims to encourage prudent savings decisions by pension fund members. Instead of emptying their entire pension pots to be able to buy a fast car, under the proposed legislation they would only have access to a third of their money and would need to carefully assess how to use it. This way, a portion of pension savings will be preserved for eventual retirement: members will effectively be wearing a seatbelt to ensure their safety on the post-retirement journey.

Retaining a portion of pension savings is likely to ensure that fewer pensioners face destitution upon retirement. The social safety net, or seatbelt, helps them to reach their destination relatively unscathed. Ultimately, whether it is in a Lamborghini or a Toyota, the result is a more secure retirement (a vehicle with seatbelts). Let’s extend the transport analogy and look at some of retirement fund members’ choices when they start their working life. At various times on the working journey, employees venture to the showroom floor of the car dealership to select suitable options for saving for and getting to retirement. Members make these choices when joining a firm, starting to save for

retirement, selecting contribution rates and plans within the employer’s scheme, and deciding to retire. It istempting to choose the Lamborghini, all bright and shiny. But the budget, in this case, consists of a third of the pension pot that can be accessed at any time. So, with a rather resigned sigh, they look at other options. If, at the outset, retirement fund members were educated about their options and understood that this particular Lamborghini came without a seatbelt, would they still be so disparaged by the limitations to their choices? I suspect not.

It is also important to note that, even with a more limited choice, members still have a fair degree of discretion. There is room for flexibility. They can choose the make, model and colour and still effectively get to drive themselves on their retirement journey. They can also choose to put more money aside in a retirement annuity. But, to emphasise a point, they get to do so safely.

It is the role of trustees, pension plan providers, consultants, and their ilk to help ensure that members are comfortable wearing their seatbelts. Members need to be educated as to the rationale for retaining two-thirds of their pension pot, and educated about the choices that are still available as they move closer towards retirement.