Listening to life companies, you’d think most pensioners are destined to frugal retirements and better get used to the idea now. They berate South Africans for not saving enough money towards retirement, and whenever they get the opportunity, cashing in what little they have saved instead of preserving it. Of course, they have a point. But go onto any social discussion forum and you will see endless complaints from individuals who have done exactly what life companies say they must, yet are disappointed when they see their actual savings after their life company deducted its costs.
What do they offer you in return for the approximately 2% of your capital they siphon off? It is not the capital – you earned that. It is not the return – the JSE or money market delivered that. In fact, these are not the right questions to be asking, says financial adviser Bryan Hirsch. It is all about savings. A country such as Australia has a national savings scheme, and South Africa has been pondering a similar solution, which removes ‘financial products’ from the equation and emphasises compulsory savings.
Sanlam does an annual survey which invariably reveals the need for more saving. Danie van Zyl, head of guaranteed investments at Sanlam Employee Benefits, says that 60% of pensioners say they do not have enough money, and Sanlam’s advice (echoed by the life industry) is that people should start saving earlier. Other revealing statistics are that on leaving a job, two-thirds of people opt to cash in their retirement savings, and worst of all 47% of members say they have “no idea” of what their retirement savings are invested in.
Disconnect between people and retirement
This reveals a disconnect between members (never mind the broader public who are not on a retirement scheme at all) and retirement, says Van Zyl. He says most people only wake up to the issue of retirement when they are about five years from it. The disconnect began 20 years ago when companies shifted from defined benefit to defined contribution. It is therefore not so much that people have lost interest, but when they needed to take an interest they failed to do so, and that is at the heart of the problem, says Hirsch.
Have a plan – and a budget
South Africans rank poorly in financial planning, but Hirsch claims their debt ratio is not as bad as many think – they have disposable income to save, they just don’t know it. “If you do not operate according to a budget, how can you identify costs that could be trimmed to make space for saving? A budget is critically important to calculating how much you can save – and often without even limiting your lifestyle,” he explains. Hirsch also says that retirement is something that has to be confronted: people need to work out exactly what they will need in retirement to live (taking into calculation savings they might have outside the retirement net) and work backwards to what they need to save now. “In particular, you have to pay off all debt including your bond, and make provision for future medical costs.”
The fundamental problem in South Africa is that retirement saving is not compulsory and its preservation not enforced. Current regulations almost encourage people to cash in, as the tax rate charged for it is a low 18%. “I believe even fewer people will consider preserving in the future,” says Hirsch.Van Zyl says there is another area that may soon worsen the savings rate. With the increase in compliance around pension schemes, many smaller funds are opting to join umbrella funds to minimise costs. That’s a good move, he says, but inexplicably Sanlam’s survey also demonstrates that many companies are using the excuse of the shift to reduce their employer contribution. So employees are now saving even less than before. He expects the shift to umbrella schemes to gain momentum.
Save 15% over 35 years
Sanlam claims that each individual needs to save a total of 15% of his income over a period of 35 years, whereas the average among members at the moment is 11,7%. With longer lifespans, even this may not be enough. European governments are currently looking at extending the retirement age to 68 or 70. In South Africa, with our youthful – and unemployed – population the trend is to lower it to 55.
Retirement planning is all about compounding – every month lost becomes harder and harder to make up. Another frightening statistic, says Van Zyl, is that pensioners can no longer bank on living off their own children. Not only are those children struggling to make ends meet, but half of grandparents today have dependents still living with them due to the impact of HIV/Aids. Members may cash in one-third of their benefit on retirement, which is supposed to be a ‘rainy-day reserve’ but a quarter of pensioners spend it intwo years.
Hirsch’s solution is for people to take control of their own finances – budget, quiz your financial adviser on every investment, especially the costs, and minutely inspect every household bill for potential savings.
Supplement with an RA
For the individual in formal employment it is customary for membership of the pension scheme to be compulsory. Danie van Zyl, head of guaranteed investments at Sanlam Employee Benefits, says that if the combination of your employer’s and own contributions is not 15%, then supplement it with a retirement annuity (RA). If you are self-employed, then buy an RA up to 15% of your income. To the cynics who say life companies are making money out of them, and they could do a better job themselves, the life industry argues that people clearly aren’t, because whenever they can, two-thirds cash in their benefit. The benefit of contractual savings over unit trusts or property is that it forces people to save.