So, you are in a company pension or provident fund; therefore, your pension and financial security in retirement are sorted, right?
One of the sad facts of the South African experience is that approximately only 6% of all South Africans have a retirement benefit equivalent to their salary just prior to retirement. Most do not have enough retirement capital saved. This alarming statistic has not improved over the past 20 years despite the industry’s intense efforts to educate and advise retirement fund members.
The big danger of apathy and complacency is that you do not critically assess your financial journey through life on a regular (annual) basis, and you drift towards retirement without knowing your exact circumstances or whether you will have enough for retirement.
Once you take into account the increase in medical aid costs and longevity, the retirement picture can become quite challenging.
All is not lost, a critical assessment of your current financial position and the introduction of a committed plan of action to improve it will lead to a better retirement outcome.
The good news
Over the past year, there have been several positive major events which have happened in South Africa, namely:
- The general election on 29 May and the forming of the Government of National Unity.
- The introduction of the Two Pot retirement system on 1 September.
- The overall reduction in the price of petrol and diesel.
- The general increase in investment returns.
- The reduction in interest rates by 0.5% (0.25% on 20 September and 0.25% on 21 November).
- The reduction in the inflation rate to 2.8% year-on-year in October.
All these have had a positive effect on the economy, and most are beneficial to consumers, as they present an opportunity to make additional savings for retirement.
Reducing your retirement outcome
Many South African households are struggling financially due to increasing prices and the cost of living and have taken the opportunity to access part of their retirement savings through the Two Pot legislation changes. Almost two million fund members have withdrawn R35 billion from their funds to date, and SARS has collected approximately R5 billion in additional tax from this.
While this has been a great advantage for many to reduce their debt, it does mean that two million of the members in formal retirement funds have reduced their retirement outcomes. While some of the amounts have been small, if they have many years to go to retirement, the long-term effect can be dramatic. Of concern is the probability that some members will continue to take withdrawals from their savings portion on an ongoing basis, thus reducing their retirement outcome even further.
Some employers also allow members to adjust the retirement component of their annual salary package by increasing or reducing their retirement contributions on an annual basis. There is always the temptation to reduce this during times of financial stress to increase their take-home pay and not increase it again when their situation improves.
Additional savings opportunity
The reduction in interest rates has provided relief on the servicing of debt, such as housing and vehicle financing loans and credit card debt, resulting in lower payments.
It is a wonderful opportunity to put that monthly saving into additional voluntary contributions to your retirement fund and gain tax relief on these additional contributions.
Many people receive bonuses in December, and they should consider utilising part of this to save for their retirement and receive tax relief on the contributions.
Small steps like these can become very powerful if implemented regularly.
Most funds have a member portal on their website or through the fund’s WhatsApp account. These portals have powerful financial tools to assist fund members in assessing their retirement outcomes on an ongoing basis.
For example, the additional voluntary contribution calculation shows the effect of contributing an additional monthly amount. This is often the catalyst to motivate members to save more.
End Goal
Reaching retirement is not the end goal, it is just the start of the next phase of your life, your retirement journey. Take action today to ensure that you receive the retirement outcome that you want and deserve.