The road towards financial freedom at retirement
An average of 6% of South Africans can successfully retire on the money saved during their working life without drastically comprising their quality of life at retirement. These shocking statistics have made the National Treasury propose some changes to retirement reform.
In September and October this year, the Treasury released four technical discussion papers around issues relating to strengthening retirement savings:
1. Enabling better income in retirement;
2. Preservation, portability and governance of retirement funds;
3. Incentivising for non-retirement savings; and
4. Improving tax incentives for retirement savings.
“The current rates of preservation in South Africa are exceptionally low,” says Francesca Kilfoil of PSG Konsult Corporate. “This creates enormous pressure on the state’s old age grants and increases the reliance on others in one’s old age. Compulsory preservation and the realignment of pension and provident funds may assist in alleviating the current retirement crisis as it would limit, or at least restrict, access to retirement funding savings prior to retirement age.”
She says that too often members within 15 to 20 years of retirement change employers and cash in their savings in the group retirement scheme to fund a dream holiday or an unaffordable vehicle. “The same goes for members accessing their preservation funds for a once-off withdrawal, taking 99% of the share or fund, or members surrendering their retirement annuity policies before maturity. All of which impacts on financial freedom at retirement.”
5 options individuals can follow to prevent pre-retirement leakage
1. Full withdrawal with an adjusted tax threshold. This option allows members full access to their funds, as is currently the position when someone resigns. However, they would be taxed on the withdrawal above a certain level, which aims to disincentivise a cash withdrawal.
2. Three-to-five-year default monitoring period: The suggestion is that the tax imposed on members, as outlined above, is closely monitored for three to five years. Pending the outcome, a new strategy could be adopted. “Best guess, there may be a drop of 15% in preservation leakage, but that is a bumpy road to reform,” says Kilfoil.
3. Partial withdrawal: This option would allow members to take a maximum of 1/3 of the benefit and the remainder would have to be preserved for retirement. This has appeal as it preserves the majority of the benefit while allowing the member some level of flexibility.
4. Maximum income per month: A maximum income per month could be allowed from the share of fund if the member is unable to find another job. “This may be too easy for opportunists no longer wanting to work,” says Kilfoil. “However, the typical worker, for financial security, does not resign until new employment has been confirmed.”
5. Full preservation: “This talks to a short road to reform,” she says. Full preservation could be enforced and access to funds would only be permitted at retirement.
Of course, there would be exceptions and exemptions to the above options for retrenchments and perhaps temporary and permanent disability members.
Kilfoil maintains that before preservation can be fully addressed, portability between pension and provident funds needs to be aligned from a tax and benefit perspective. “This would involve the equal treatment of pension and provident funds and could take on a phased approach whereby no new provident funds are registered and existing provident funds do not accept new members. Alternatively, the value of the benefit on the date of implementation can be paid out as a lump sum and all subsequent contributions would be subject to the new dispensation. Lastly, a vesting-type scale may be applied. This would be based on a member’s age of 50 years: Those above 50 years of age could, at the date of implementation, take a larger portion of their benefit as a lump sum, whereas members below the age of 50 years would have to fall in line with provisions of pension fund at retirement.”
The last aspect of technical paper C surrounds fund governance or perhaps the lack thereof. Fund governance stems from the capability and competency of the board of trustees. Regular and compulsory trustee education through training is being considered to emphasise the good governance issues. A consideration is also that certain Financial Services Board circulars on good fund governance, be implemented as directives and not board notices.
Kilfoil says that the technical paper is very clear on one aspect and that is that whatever final policy is adopted, after full consultation with the various stakeholders, accrued or vested rights of members will always be protected. “This is a sigh of relief for members, as there is a long road ahead for social reform.”
