According to a recent survey, many South Africans are simply not ready for the financial consequences of retirement.
While saving for retirement on a regular basis and throughout your career is very important, preserving your funds when changing employers should also be right at the top your list of retirement savings do’s, says Shreekanth Sing, technical legal adviser at PSG Wealth.
The 2018 Sanlam Employee Benefits Benchmark Survey shows that retirement fund members are still no closer to their desired financial outcomes or maintaining their pre-retirement standard of living.
Further, 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 vast majority (44%) of survey respondents noted that they have had two to three jobs since they entered the workforce, followed by 29% who have had four to six jobs since they started working. 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 to continue providing for them when you are no longer working.
One of the biggest problems in South Africa is people cashing out their accumulated retirement savings when resigning from a job, said Sing.
When changing jobs, your employer will usually ask what you want to do with your retirement savings. You can either transfer to another fund, like your new employer’s retirement fund or a preservation fund, or you can take a portion (or all) of your savings in cash.
A 2015 survey found that two-thirds of people leaving their jobs cash out their retirement savings, and many of them use the money to pay off short-term debt for example. The long-term impact of this can be catastrophic.
Impact of withdrawing your retirement savings
The scenario below shows the impact of withdrawing your benefits. By withdrawing R261,972, Thembi has R1 million less at retirement, which translates into approximately R4,500 less income per month.
Understanding your preservation options
While you can preserve your money in a retirement annuity or in your new employer’s retirement fund, many people want the flexibility of being able to access their retirement savings if they need to.
Preservation funds can be a good option to help people resist the lure of short-term spending, while allowing their accumulated savings enough time to grow tax free, said Sing.
What is a preservation fund?
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 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 funds, Sing stressed.
“If you want to retire with enough savings to last a lifetime, you need to ensure that 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.”
More about preservation funds
- You can retire from your preservation fund at any time after the age of 55. In this way you can also stagger your retirement.
- There are two types of preservation funds. Provident preservation funds accept money from provident retirement funds. Pension preservation funds accept money from pension retirement funds.
- On retirement from the provident preservation fund, currently, your entire investment value may be taken as a lump sum or invested in an annuity or a combination of the two.
- On retirement from the pension preservation fund, a maximum of one-third of your investment value may be taken 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, the full amount can be taken as a lump sum.
- No ongoing contributions can be made to the preservation fund.
- Your selection of underlying investments will have to comply with the limits set by Regulation 28 of the Pension Funds Act. Regulation 28 limits are aimed at preventing investors from taking too much risk with their retirement savings. Various asset limitations include a maximum of 75% equity, 30% foreign equity and 25% property exposure.