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Retirement Planning
Monday, May 1, 1989
Bridge that gap

By the time they reach retirement age, 34% of South African tax payers have to continue working. Another 32% manage to exist on state pensions while a further 17% depend on their families to stay alive.  These facts emerge from Norwich Life which is using the figures to promote annuities to help bridge the “income gap”. This Norwich defines as the difference between pre-retirement income and post-retirement income.
The group’s life marketing manager, Stirling Kotze, points to the mobility of the average employee as the main reason for the income discrepancy after retirement.
According to Kotze, “People should retire on about 80% of their last salary. The problem is that when employees switch jobs they lose their employers’ pension fund contributions and seldom re-invest what they have put into the fund. “The more mobile a person is in the employment market, the bigger the gap between his pre- and post-retirement income.”
Norwich Life notes that 15 years of service with one company and one pension fund will give the contributor 30% of his last year’s income. This implies an income gap of 70%. Sadly, the average length of service of a typical employee in one pension fund is just over 15 years.
Mr Kotze does not believe that the answer to the problem lies in legislation. “Forcing people to re-invest their pension fund contributions is problematic. What about the person who has been retrenched? “Also bear in mind that many black contributors to pension funds regard this as a form of security in the event of losing their jobs.
“Legislation is almost impossible and my feeling is that the answer lies in education. “ People need to be made aware of the need to provide for their retirement. Mr Kotze believes income gap problems can be solved by making use of retirement annuities.
“Because a pension fund is subsidised by the employer this medium is best if a person remains with one employer for his full working life. Since few people do this, they would be wise to supplement their retirement income with a retirement annuity. This is essentially the same as a pension fund.” Taking a different view, Mr Kotze points out that in a pension fund, younger employees effectively subsidise those about to retire.
Because they inevitably leave the company long before retirement the young contributor has not enjoyed any benefit himself. This, however, would not be the case had he invested in a retirement annuity.
21 – World Insurance

Copyright © Insurance Times and Investments® Vol:2.5 1st May, 1989
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