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Retirement Planning
Sunday, August 2, 2015 - 11:36
Range of challenges

According to research reported in the 2015 Sanlam Benchmark Survey 63% of members and 57% of pensioners used withdrawal benefits to reduce debt.

“The reality is, today’s retirees are faced with a range of challenges, all impacting their ability to save for retirement and sustain the same standard of living they were able to uphold prior to retirement,” says Viresh Maharaj, chief marketing actuary at Sanlam Employee Benefits.

Dependants remain a factor

According to the research, South African retirees are not able to maintain their standard of living in retirement, with 62% admitting they experienced a reduction in income at retirement.
Factors chewing away at funds were identified as:
• having dependents post retirement (66%),
• income not keeping up with inflation (60%),
• market downturn (22%),
• spending of the lump sum (19%)
• having to pay off pre-retirement debt (19%).

Of the percentage of retirees who still have dependents, 54% are supporting a spouse and 30% a child or other dependent.

Continued disinterest

Alarmingly 72% of members said they have never gone back to revisit their original retirement planning decisions.
It seems the urgency to seek advice regarding retirement savings at an early age was also lost:
• only 5% of members admit to seeking financial advice 20+ years prior to retirement,
• 49% will seek advice within 10 years of retirement,
• 67% of pensioners first received advice within 10 years of retirement,
• 20% of the respondents first received advice at their retirement date, and
• 30% of members stated that they aren’t particularly interested in the details, and that they are simply happy to receive the benefit and 26% admit not having enough knowledge or experience of investments to be able to make alternative choices.

Cost of debt

South Africa does not have a strong culture of saving.

“With debt being easy to acquire in South Africa, people are taking advantage of the option to have extra cash at hand, unfortunately they don’t realise the true cost of the debt they undertake,” explains Mayuri Reddy, marketing strategist at Sanlam Employee Benefits. According to statistics released by the South African Reserve Bank in April 2014, debt service cost to disposable income of households amounts to 7.7%.
Of the members who used withdrawal benefits to reduce debt:
• less than half realised the level of tax to be paid on the withdrawal benefit,
• 45% did not realise the effect the withdrawal benefit would have on their overall retirement outcome,
• more than a third regretted the decision to withdraw.

“One of the key findings from this year’s results is the disconnect between the perceived reality and the actual reality: 87.7% of members believe they have their debt under control, but the numbers clearly state the opposite. Both members and pensioners perceive hurdles such as debt and withdrawal as a small, short-term decision with a small impact, however, it is this misperception that hampers them in the long run,” she says.

Withdrawal prevailing preservation

The research has once again singled out the lack of preservation, the simple act of reinvesting your cash in a retirement savings vehicle upon early withdrawal from your pension fund, as a major threat to retirement outcomes for savers.
Many instinctively withdraw as much cash as they can from their accumulated savings without considering the trade-off between taxation on the withdrawal versus the additional level of income they can secure in an annuity. Notes Maharaj, “Employees do not understand the consequences of cashing out their retirement funds while, employers are not doing enough to educate them about the implications.”
He explains that “failure to reinvest your retirement savings will have a material impact on the quality of your life in retirement. Assuming that you change jobs every five years you could end up with as much as 16 times more capital upon retirement by simply preserving your savings rather than withdrawing the cash each time.”
He also emphasises that employers and fund trustees must do their part by providing simple, easy-to-understand communication to their employees and fund members at the right time. “We must all strive to avoid an information overload on the employees’ first day of employment, as this results in new employees becoming disengaged from the retirement savings process,” he concludes. “That means addressing member apathy on the one side and the employers’ abdication of its duties on the other.”

Copyright © Insurance Times and Investments® Vol:28.5 1st May, 2015
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