With greater emphasis being placed on the importance of saving towards a financially secure retirement, members of retirement funds need the reassurance that the people to whom they have entrusted their hard-earned savings, (Boards of Management of retirement funds) display a high moral code, are trustworthy and will manage their funds prudently and lawfully.

King IV report on corporate governance

The King Committee published the King IV Report on Corporate Governance for South Africa 2016 (King IV) on 1 November 2016, and it is effective for financial years commencing from 1 April 2017.

Focus on retirement funds

King IV is the first report which has a sector supplement drafted specifically with the governance of retirement funds in mind. The supplement – and King IV as a whole – applies to all retirement funds, including pension funds, provident funds, preservation funds and retirement annuity funds. It also encourages retirement funds to follow the Code for Responsible Investing in South Africa (CRISA), a voluntary code applicable to institutional investors, including retirement funds. Both CRISA and King IV are viewed as complementary codes that reinforce and complement each another.

King IV objectives

The objectives of King IV, as set out in the report, are to:

• Promote corporate governance as integral to running an organisation and delivering on four main governance outcomes: (i) an ethical culture, (ii) good performance, (iii) effective control and (iv) legitimacy, via effective leadership by the governing body (being the Board of Trustees in the retirement fund context);
• Broaden the acceptance of King IV by making it accessible and fit for implementation across a variety of sectors and organisational types (including retirement funds);
• Reinforce corporate governance as a holistic and inter-related set of arrangements to be understood and implemented in an integrated manner, and
• Present corporate governance as concerned not only with structure and process, but also with an ethical consciousness and conduct.

The Supplement for Retirement Funds (“the Supplement”) is the first retirement fund specific guidance issued by the King Committee.

The Supplement sets out no fewer than 17 (reduced from 75 in King III) basic principles, which, according to the King Committee, should be adhered to in order to meet the four main governance objectives listed above.

Unlike the King III, which called on companies to “apply or explain”, King IV requires entities to explain how the principles are applied, i.e. the “apply and explain” approach, requiring organisations (retirement funds) to be transparent in the application of their corporate governance practices. Importantly, King IV advocates an outcomes-based approach (rather than rules-based) aimed at achieving favourable outcomes for fund members.

PF130

King IV builds on the existing Pension Fund Circular 130 (PF130), released in 2007, as a ‘best practice’ good governance circular for retirement funds.

Key principles for retirement funds

1. CRISA is complementary to King IV
2. Fund leadership and corporate citizenship must ensure an ethical culture in the fund
3. Fund performance and reporting must ensure creation of value for fund members
4. Fund governing structures and delegation must be set up to ensure adequate and effective controls
5. Fund governance and functional areas must be set up to ensure adequate and effective controls
6. Fund management of stakeholder relationships must result in trust, a good reputation and legitimacy of the fund.

Proportionality

A concept emphasised in King IV is proportionality. This is important because practical implementation of the recommended practices may be rather costly for smaller retirement funds; hence, King IV recommends that Sector Supplements should be “proportionally” implemented as is appropriate for the size, resources and complexity of the organisation.

Conclusion

Whilst compliance with King IV is not a legal requirement, boards of retirement funds will do well to apply the recommended principles, as this will lead to improved stakeholder relations, with a governing body that has effective control, legitimacy and is performing well.

We stated at the outset that members of retirement funds are constantly being encouraged to save more to secure a financially sound retirement. This coaxing arises as a result of the poor savings culture prevalent in South Africa. Coupled with financial education, good corporate governance – with specific focus on ‘transparency’, as outlined in the King IV report on corporate governance – will, hopefully, lay the foundation for improving the way in which members view savings.

South Africans are understandably concerned about the future of healthcare delivery in our country and especially in light of the recent release of the White Paper on NHI.

The healthcare consulting team at Chartered have raised some interesting points below that may assist members in grasping the key areas of concern.

South Africa’s National Health Insurance (NHI) system is to be fully integrated by 2025, according to the health department.

The NHI Policy Document, published in August 2011, proposes that this project will be implemented over a 14-year period. The implementation is divided into three phases, the first of which is targeted for completion by 2017.

The highly anticipated second draft of the White Paper on NHI was gazetted as official government policy on 30 June 2017.

Cost and funding of the proposed NHI

The estimated cost is R256 billion, based on the 2010 cost figures used in the 2011 Green Paper, and includes annual inflationary increases. The GDP growth projections of 2-5% are being used to estimate the funding shortfall. The GDP actual growth figures of 0.3 % in 2016 have been acknowledged but not used in the projections.

The funding of the NHI will be through a combination of various sources which include but are not limited to:

• the payroll tax
• a surcharge on taxable income
• Value-Added Tax.

Another source of funding being reviewed is the discontinuation or repeal of medical aid tax rebates or credits which amounted to R18.5 billion in 2014/15.  This will require amendments to the existing legislation and enactment of new laws. The Minister of Health, Aaron Motsoaledi, still needs to meet with Treasury and engage with SARS on this matter. Individuals will not be allowed to opt out of making mandatory pre-payment towards NHI, however, they may choose not to use the NHI health services.

What does NHI offer and how will this impact medical schemes?

NHI proposes three areas of healthcare service delivery:

• Primary Health Care (PHC) services – HIV and Tuberculosis, chronic non-communicable diseases such as Hypertension and Diabetes, and injuries;
• Hospital and specialised services – Emergency medicine, Surgery, Organ Transplant and Oncology, Cancer treatment;
• Emergency Medical Services (EMS) – Basic life support, Medical Rescue, Cardio-Pulmonary Resuscitation (CPR)

Note: this is not an exhaustive list

The role of medical schemes

Medical schemes will change from the existing model to a system that provides complementary services for non-essential services not covered by NHI.  The details of this are still a grey area.  There are various discussions currently taking place with the relevant stakeholders on how to initiate the realignment of medical schemes benefits. Paresh Prema, the Head of Benefits Management for the Council of Medical Schemes speaking at the 2017 BHF Annual Southern African Conference, says that “medical aids may only know their fate under the NHI by 2020” (source: Joan van Dyk: Mail and Guardian, 24 July 2017).

Will South Africa be ready by 2025?

The NHI White Paper is an elaborate document with idealistic outcomes and numerous frameworks; however, its lacks detail that clearly illustrates how this multi-layered complex project will be executed. The next phase, which extends from 2017 to 2022, will focus on the development of NHI legislation, amendments to other existing legislation and purchasing of personal healthcare services for vulnerable groups.

We believe that whilst NHI is a noble initiative and in line with our Constitution, the execution requires major resources such as adequate funding and the disciplined expenditure of such funds, human resources and infrastructure. Even were these resources available at the required level, the successful implementation will still be heavily reliant on a robust, solid and efficient plan of action.

Furthermore, we believe the involvement of the private sector is crucial. The best way forward is for the private sector and the Department of Health to work together by pooling resources and experience.

Whilst the Minister seems confident with the timeline, the deadline seems optimistic in view on what is still required.  A crucial component that appears to be overlooked is the generation of overall citizen confidence.

The burning question remains: Will NHI leave citizens in the same position they are currently, which is a less than ideal state system, or will NHI achieve the much needed improved access to quality healthcare at a price that is affordable for the majority of South Africans?

For more information and to follow the debate on NHI, visit this website:  http://www.nhisa.co.za/

Currently, some Chartered staff are conducting Financial Literacy workshops with the staff of Iphutheng Primary School in Alexandra, as part of our Corporate Social Investment programme. We cover budgeting, savings and investments, debt management, financial and retirement planning.

Recently, we addressed Retirement Planning. Three areas of focus were:

• Retirement and risk benefits, to understand conditions of employment
• Emphasising retirement as a time of happiness and relaxation
• Addressing the importance of maintaining your health in retirement.

Most members we address understand their existing benefits, but not necessarily what is required to provide for a financially secure retirement.

Retirement planning tends to deal with managing financial challenges, which can result in fear and worry. Sadly, very little discussion centres on the equally important and with this in mind we attempted to brainstorm and create awareness, with the help of our enthusiastic staff, on some of these often neglected areas which are so critical to a happy retirement. They identified some of the key areas detailed below, which we wish to share as they are so relevant and important, for all retirees

Use of time

Most of your career time is spent at your place of work. Assuming you work eight hours a day, five days a week for 48 weeks, retirement will see you having 1 920 hours per annum to occupy yourself. Boredom kills – so what are you going to do, we asked. Some ideas we received from our delegates were to, use your hobby to start a business to generate additional income. Join professional institutes, write articles, grow own vegetables, do handyman jobs for friend and local companies, have a regular exercise routine and do voluntary work

Hobbies

Now is the time to enjoy, spoil oneself and do what you have dreamed about, but never had enough time before, like writing about personal interests, doing talks at schools and charity organisations, studying further, attending shows and theatre. If you have foreseen that the time will arrive when the alarm clock does not usher in another day of work, but one which belongs wholly to you, then the changeover will not worry you at all. So nurture your interests and hobbies and remember you will be free from the restrictions imposed on your time by your employer once you retire. It is of vital importance to stimulate your mental and physical faculties

Health

Our bodies are designed to be used and if they are neglected they wither. This goes for our brain as well as our muscles. Our muscles must be used and our joints kept mobile. Our heart requires regular exercise to keep it in good working order. Remember, in retirement you no longer have the excuse that the pressure of work prevents you from having time to exercise. Have regular medical check- ups and visit your doctor, particularly if unusual symptoms appear. Look after your weight, feet, teeth, eyes and hearing. Regular exercise like swimming, walking, tennis, squash and golf are vital to keep your body healthy. Stimulate your brain because it must also be exercised. Study, read do crosswords as this prevents boredom.

Relationships

Before retiring, you will probably have been in full time employment and may not have spent considerable time with your spouse or partner. After retirement this will change and you will have to learn to become a full part of the family. This can be very testing for a relationship. Consider how retirement may change your relationship. Do you have common interests? Do you play sport or share similar interests? Try and understand each other’s needs and most importantly have a sense of humour

Living relationships

You need to do some practical thinking about your home, well in advance of retirement. Decisions about where you wish to live are very personal and can become significant areas of conflict if not carefully discussed and considered before retirement. Do you want to move or stay where you are? Do you wish to relocate to another country, province or town. Calculate the cost of moving and the challenge of leaving family and friends behind, while having to make new friends in a new area. Do you downscale into a complex or retirement village? These are big decisions and a careful analysis should be done by you as a family before making a decision which could create financial and emotional hardship

Safety and Security

The importance of examining the home defences and strengthening the weak spots was discussed. Leaving lights on, ensuring windows and doors are securely fastened, keeping in contact with neighbours, knowing their contact details and becoming involved in a neighbourhood watch would also help to get to know the community better. Do not have large sums of money in the house as this was also identified as a security risk and the practice was discouraged.

In addition there was a big focus on keeping the home safe. Good lighting and no loose carpets, mats or objects on the floor, would prevent accidents. Replace old appliances and check plugs and wiring in the house.

Conclusion

At the conclusion of the workshop the excitement amongst the staff was so evident. Their views on retirement had changed and they all agreed they needed to look at retirement from a holistic point of view and that all aspects of their life (with some being discussed above) should be taken into account. Obviously, the most overriding aspect is that of financial planning. However, if any other area of your life is neglected an imbalance is created which can have dire consequences. One only needs to think of neglecting your physical health and the impact this can have on the rest of your life.

Speaking up when you feel let down

As South Africans, we are certainly accustomed to seeing people expressing their discontent – sometimes effectively, often not.  In this month’s Xpress comment, our Healthcare Consultant, Paramesh Dayaram, explains the channels that we should be using to voice our legitimate Employee Benefits complaints.

April saw two tidal waves of mass protests hit the streets of major cities nationwide to signal the demand for an end to government corruption.  The notion of the country’s leaders and leading party being captured for the financial advantage of others is what has galvanised ordinary citizens into action.

While not all concerns have a national impact, we all hate being exploited.  Our sense of outrage is magnified when there appears to be no clear way to express concerns or have our dissatisfaction heard.  So, what does a consumer do with a valid complaint regarding poor service?

An increasing number of bodies have been established to consider legitimate complaints – various industry Ombudsmen, the National Consumer Tribunal, the National Credit Regulator, for example.  In recent years, South Africa has created regulations in consumer protection, including, the Consumer Protection Act, Treating Customers Fairly (TCF), the National Credit Act, FAIS, FICA.

In this month’s newsletter, we focus on the regulatory bodies you can consult regarding your employee benefits, specifically in respect of the Medical Industry and Pension Funds.

Valid complaints and complaint processes:

Medical Schemes

You have received an outcome from a medical scheme that you feel is unfair. You have escalated this through the scheme complaint resolution system, but are still aggrieved. The Council for Medical Schemes has a dedicated division that aims to resolve complaints to ensure that beneficiaries of medical schemes are treated fairly. For more information on the complaints process log on to www.medicalschemes.com

Healthcare Practitioners

You have received a level of service from a healthcare practitioner not in line with the high standards, professionalism or ethical standards of behaviour outlined by the Health Professions Council of South Africa. Should you wish to lodge a complaint, HPCSA allows the public to file and request an investigation into practitioners whom they believe have acted unethically or caused harm. For more information on the complaints process log on to www.hpcsa.co.za

Nurses

You would like to report an incident of professional misconduct against you by a nurse. The South African Nursing Council has a complaints division that investigates any complaint of conduct that violates the high standards of care to which a patient is entitled. For more information on the complaints process log on to www.sanc.co.za.

Pension Funds

Once you have raised your complaint with the fund of your employer and have received a reply with which you are still not happy, you may lodge a complaint with the Pension Fund Adjudicator. Your complaint must relate to the administration of a pension fund, the investment of its assets, or the application of its rules. For more information on the complaints procedure log on to www.pfa.org.za.

Financial Services

The FAIS Ombud’s role is to resolve disputes between financial services providers and their clients. The complaint will be considered if it is alleged that the provider or representative has acted in contravention of the FAIS Act and has negatively impacted the complainant. For more information on the complaints procedure log on to www.faisombud.co.za.

Tips for a successful complaint submission:

1. Your complaint should have a sound basis and merit; the above bodies have clear guidelines on what constitutes a valid claim.
2. Ensure that you have clear records of documents.
3. Clear timelines of all communication, names, dates and reference numbers.
4. Stick to the facts and avoid emotion-fuelled correspondence in your complaint.
5. Whilst you may not always win in a complaint process, it is important to know that you have exhausted all avenues to express your dissatisfaction and your complaint was given due consideration.

Greetings from Trevor Taylor, Managing Director at Chartered Employee Benefits.  This months blog post deals with the topical issue of covering healthcare expenses that Medical Aid Schemes do not cover.

Devlin Ross, our Healthcare Specialist at Chartered Employee Benefits, was recently interviewed by Moneyweb on the subject of Gap Cover.  Given current concerns about the quality of healthcare generally, the subject of Gap Cover is certainly one worth exploring.  

Are any out-of-hospital procedures covered with gap cover? If not, is this a future possibility?
Generally, no, but most offer a casualty benefit. The cost of a casualty account is considered an out-of-hospital expense if the patient is not admitted to the hospital.

Any other restrictions with gap cover?
There is waiting period applied to members: this may range from a 3-month general waiting period during which a member cannot claim at all for said 3 months, to a 12-month condition-specific waiting period (recently amended after the final draft of the demarcation regulation was published), during which a member cannot claim for a specific medical procedure or procedures related to a specific medical condition.

Who should take out gap cover? Why?
Members of a medical scheme. Gap cover adds to a medical scheme in-hospital benefit. Specialists’ fees are not regulated in South Africa and this has resulted in medical schemes creating a cap on the percentage of cover they will fund; for example, a medical scheme will have its own rand value rate for a specific procedure like a specialist consultation in the hospital. This amount is more or less R450. We know that most specialists charge more than this amount, often double the amount.

The medical schemes plan will determine the benefit in respect of the percentage of cover. Some plans will offer 100% or 1 times their rate and other more expensive plans will cover 200% or 2 times their rate. There is no medical scheme at the moment that exceeds 300% or 3 times their medical aid rate and only the top, most expensive, plans offer 300% or 3 times their medical aid rate.

Is it just a money-making scheme created by the inefficient cover by traditional medical aid schemes?
No, medical schemes do not benefit from gap cover (quite the opposite, actually). Members of the medical scheme benefit from gap cover, and this is owing to, in my opinion, the inefficiencies in our ability to legislate the private sector.

Is gap cover extremely specific regarding ailments and scope?
Gap cover aligns itself with the benefits of a medical scheme and therefore bases its cover on the benefit of a medical scheme.

What are the benefits and downsides?
The benefits are significant savings in the ever-increasing cost of medical treatment and due to the lack of the above-mentioned legislation, they have little or no recourse in respect of recouping costs. The downside is that of most insurance policies: if you never claim you never get your premiums back.

What do members look for when selecting gap cover?
Look for 500% or 5 times medical aid rates of cover. Another benefit overlooked by most is the co-payment benefit; this is a key benefit as most if not all medical schemes use co-payments when members are admitted to the hospital. In any new policy, members MUST read and understand the benefits and conditions of said policy.

Any trends in the demographics of people who have gap cover?
The only trend at the moment is an increase in the number of people who want to join and the utilisation by existing members as they become more familiar with the product and its value.

Has the growth in gap cover been curtailed somewhat by recent caps on shortfall benefits?
It is still too early to tell as this only came into effect from 1 April 2017. However, most gap cover providers have stated that members’ claims very rarely, if ever, exceed the new limits determined in the regulations. The regulation allows for any members who joined a gap cover provider before 1 April 2017 still to have an unlimited benefit.

These policies will align with legislation from 1 January 2018. Any new policies entered into from 1 April 2017 will be subject to the annual limit of R150 000 per person on the policy.

Any current products covering
day-to-day self-payment gaps for medical scheme members (out-of-hospital claims)?
No

What would be needed for such a product?
A lot of research. A current gap cover policy works on the risk principle whereby a member may never claim. The insurer can thus benefit from cross-subsidisation. It is almost inevitable that member will reach their self-payment gap and may even be encouraged to do so if they have such a product.

Is development of such products limited by CMS demarcation regulations?
This will depend on the insurance category under which this product will fall.

Is there a need for such a product?
Very much so.

How can members best manage their medical scheme plans to avoid or deal with self-payment gaps?
By understanding how self-payment gaps are managed by their respective medical schemes. An independent medical scheme advisor should be consulted given their level of expertise in this matter.

What can be done to curtail doctors and specialists charging above medical aid rates?
Absolutely. The best way to help reduce these costs is to talk to your doctor and negotiate pricing with him or her. Doctors will often reduce their fees if you offer to pay cash; you can then claim back from your medical scheme.

Some doctors contract with the medical scheme and agree not to charge above the specified rates – this should also be discussed with the doctors performing the procedure. The member should also make an effort to understand prescribed minimum benefits. This is a set of 290 conditions for which medical schemes are required to cover the cost of treatment, but are, however, permitted by the Medical Schemes Act to enforce the use of contracted or network doctors.

What is the outlook for gap cover products in the near future?
Based on the changes in legislation and the increase in utilisation we will definitely see hefty increases in premiums in the years to come.

Anything else to add on gap cover?
Although gap cover is a relatively simple concept, the scheme to which the cover attaches can be incredibly complex. It will always be in the best interest of the member to consult an expert in the relevant field for advice.

Barely is the ink dry on our most recent newsletter, and we are confronted with a dramatic turn of events:  firstly, the President’s midnight
shuffle of his cabinet, the most impact coming from the axing of the finance minister and his deputy; and, secondly, yesterday’s rapid response from ratings agency, S&P, downgrading South Africa from BB+ to BBB-.

Our Chartered CEO, John Campbell, has issued the following comment:

Policy uncertainty should not change your long-term financial goals

Last night, a 5.2 magnitude tremor hit parts of Gauteng, the second in 24 hours. It seems a fitting reflection of the monumental economic and political shifts that have hit South Africa since Thursday last week.  First tremor: cabinet reshuffle; second tremor: downgrade to junk status by ratings agency, Standard and Poor’s, from BB+ to BBB-.  Moody’s has placed us on review for a downgrade. The rand has fallen 2% since the announcement of the downgrade.

Reasons for the downgrade
According to EWN, S&P’s rationale is as follows:

1. The cabinet reshuffle reveals leadership divisions and puts policy continuity at risk

2. Poor financial performance of government parastatals places greater strain on government

3. Government and ANC divisions inhibit investor and business confidence and action

4. Slow economic rate, reflected in the contraction of 0.3% in the last quarter of 2016.

Slender positives
S&P has noted the independence of the Reserve Bank and South Africa’s monetary policy flexibility as positives.
S&P has also commented that the possibility of reversing the outlook to stable exists – dependent on the strengthening of fiscal outcomes and economic growth, and the reduction of political risks.

For all investors, it is a matter of maintaining a prudent approach and level-headed attitude to our financial planning, while we await the outcomes of this pronouncement. During times of uncertainty brought on by this and other downgrades, sticking to your long-term financial plan is critical. If you need further clarity, please don’t hesitate to contact us.

We will be updating you as matters unfold.  You are welcome to contact us with any queries.

Warm regards
John Campbell

As we approach the end of the first quarter of 2017, the world is getting to grips with Brexit and US-imposed travel bans, and South  Africa is left aghast at the failure of the system to ensure that those in need will receive their grants.

To add insult to injury, the alleged perpetrator of the OR Tambo heist brags about his new sports car and thieves break into the Chief Justice’s offices … and the threat of a Gordhan guillotining looms.

As members of our respective retirement funds, however, we must continue to save as much as we can for those days when we require funds to sustain a contented life (that will, in all likelihood, not include the purchase of a Lamborghini), and not be dependent on a state grant!

Choosing the right investment
Last year, the Association for Savings and Investment South Africa (ASISA) developed the Effective Annual Cost (EAC) measure to provide a standard disclosure of the charges that an investor will most likely incur when investing and holding a specific financial product.

This measure is designed to assist the investor to make the right choice of investment from a cost perspective and enhance his chances of saving enough for the latter years of his life.

The EAC is a standardised disclosure method that can be used by consumers and financial advisers to compare charges and their impact on investment returns on most retail investment products. It is expressed as an annualised percentage.

The EAC comprises four components added together: Investment Management, Advice, Administration and Other (this includes all termination charges, penalties or loyalty bonus payments that are reasonably foreseen if the investor terminates his contract and withdraws all the funds at the end of the disclosure period).

The various product providers (investment houses and unit trust companies) have now created an EAC calculator, allowing potential investors to insert the aforementioned four components. This will perform an accurate comparison of underlying costs.

The role of the employer in an umbrella retirement fund
At the recent Pension Lawyers Association Conference in Cape Town, the following item on the agenda caught my eye: the role of the employer that participates in an umbrella retirement fund.

There is no guidance regarding the role of the employer in such an environment in the ambit of the Pension Funds Act; hence, it was proposed by the speaker, a highly-regarded pension lawyer, that the employer had a duty of care and responsibility in terms of the common law towards its employees that are members of the umbrella fund.

This suggests to us that employers and the institutional industry (retirement funds) as a whole should learn from the retail financial services sector (the unit trust and individual financial products) and create an EAC standard for investments offered to employers and their members on the umbrella funds.

There has been a perception of a lack of transparency and understanding of the costs of the various investment options available on the umbrella fund platforms, and this can be to the detriment of the member’s final outcome at retirement.

Finally …
The second quarter of 2017 will, no doubt, bring more geopolitical and economic news that will capture our interest. We hope that in the background there are moves afoot to implement an EAC in the retirement fund world in South Africa.

Those most in need must feel the benefit.

As we head into another tax year, retirement fund members will feel the pressure of the rising cost of living and some will have to relinquish more of their earnings to the receiver.

Carol Kritzinger, a senior retirement fund consultant at Chartered, shares insights derived from her experiences with members regarding misconceptions about saving for retirement.

Having interacted with many members of retirement funds over the years, I often come across misunderstandings about saving towards retirement. In this article, I will detail and explain the ones I encounter most often.

Let’s consider an average South African employee.

Tracy has worked for several different employers over her forty years of employment. She plans to retire at 65. During her working years, she earns an income that increases annually at inflation rates. In retirement, Tracy will need an income that keeps pace with inflation and allows her to live in much the same comfort as she did while she was working.

These are her misconceptions:

Misconception #1:  Belonging to my employer’s retirement fund is all the security I need
Although Tracy belonged to many of her various employers’ retirement funds, the total net contribution was not always 15% of her gross income. One employer had no retirement fund for its employees and Tracy did not contribute towards her retirement savings during her years of employment there.

In fact:
Employers set up different contribution rates which could include or exclude the costs of administration, consulting and insured benefits. Contributions to a retirement fund are most often based on pensionable income and not gross income, which could include payments like commission. Owing to this disparity, there is a high probability that the desired income from her retirement investments will not be met. All people should consider their individual needs and supplement their retirement savings to meet their long-term goals.

Misconception #2:  When I leave my employer, it is best to use my withdrawal benefit to pay off my debts

When Tracy was retrenched from one of her employers, she cashed in her retirement savings to cover her daily expenses and debt repayments while she was unemployed. She also accepted a pay-out from a company pension fund when she moved to a new employer. In both cases, she believed that paying off her debts was the wisest course of action at the time.

In fact:

Using your retirement savings to pay off debt may provide a short-term solution, but is not necessarily the wisest choice for the longer term.  Consider the amount of tax that you will pay on your retirement savings and the strain that will be placed on your current finances to once again meet that same desired level of retirement savings. Generally, people tend to utilise the disposable income available to increase their standard of living rather than to allocate this to retirement savings, regaining the lost capital is extremely difficult.

Living only for the present and fulfilling immediate desires often comes at the cost of future security and peace of mind. Rather than resenting a sense of deprivation, aim to create a balance – enjoy the life you are living, but not at the cost of your retirement.

Misconception #3:  Retirement is years away … I have plenty of time to save for it

When Tracy was starting out in her career, retirement was a distant reality that was hardly worth worrying about. As she became older and wiser, more pressing expenses seemed to demand her attention – bond repayments, school fees, new cars… Tracey became one of the many people I meet who revealed, with a look of horror on their faces, that they have insufficient savings for retirement.

In fact:

Time is fleeting and can either be an enemy or, when harnessed for advantage, be an ally. Starting early with retirement savings doesn’t just give you a head start, it gives you a massive boost in the form of compound growth. It’s almost impossible to make up for lost time later because life only gets more and more expensive. The earlier you start saving for your retirement, the more comfortable your retirement will be.

Some points to consider about retirement

How will Tracy accumulate an income that will enable her live comfortably at retirement?
Tracy will derive this income from her retirement savings. These savings will be the accumulation of all contributions made to the retirement funds and investment growth during her working career spanning forty years.

Tracy’s retirement funding should be substantial enough to provide an income for the rest of her life.

So, how much income does she need at retirement?  It is generally accepted that in order to maintain a similar standard of living after retirement, Tracy will need an income of at least 70% of her last income earned before she retires. In Tracy’s case, she earns a gross monthly income of R10,000 just before retirement so to live comfortably after retirement, she would need an income of R7,000 per month.

To ensure retirement savings substantial enough to meet her needs, Tracy will need to have contributed at least a net of 15% of gross monthly income to a retirement fund for 40 years with a nett growth rate of inflation plus 6% per annum.

Retirement funds are tax efficient
There is no capital gains tax on growth in a retirement fund and there are generous tax deductions available on contributions to retirement funds. To reach your desired level of savings, it therefore makes sense to make additional voluntary contributions to your employer’s retirement fund or set up a separate retirement annuity.

When you retire from your retirement fund, the first R500,000 that you may take in cash, is tax free, making your retirement funds tax efficient at retirement as well. However, should you take your retirement savings before retirement (if you change employers) you will use up the tax-free portion of your lump sum. On retirement, the amounts that you have withdrawn over the years will be subtracted from the R500,000 you could have enjoyed, tax free.

Cashing in before your retirement deviates you from your desired retirement income
The current law still allows an employee to take their full retirement benefit when leaving an employer. If you do this, you will need to save all over again towards your desired goal, and with less time to do so, you will place strain on your finances and your ability to retire comfortably.

As Carol has pointed out, these misconceptions can shipwreck a successful retirement if not addressed in time.  The onus remains on the member to ensure you understand the implications of your decisions regarding retirement savings.

Remember, saving towards your retirement is your responsibility.