With the roll around of the new financial year and the looming 31 March International Quit Your Crappy Job Day, many are making career shifts. While in some cases this is not a bad idea, it does beg the question: What does this means for pension preservation?
The importance of pension preservation
“Preservation is important when changing jobs for three reasons: firstly, compound interest (i.e. the fact that your money earns interest and over time you can earn interest on that interest) means that the savings towards retirement you make when you first start working have the ability to contribute substantially to your retirement capital, more so than your later contributions.
“The second important reason is the difficulty involved with “replacing” the capital you withdrew with future contributions. Not only do most of us tend to improve our standard of living (and therefore the amount we need to spend to maintain our lifestyle) as we progress in life, but for most people it’s quite difficult to put aside say 25% of your salary for savings – which is what might be required to “make up” for the amount you withdrew,” stated Mayuri Reddy, marketing strategist at Sanlam Employee Benefits.
The final reason stems from the tax implications that would arise from you drawing capital from your pension fund. “As your contributions were tax-free, the withdrawal amount will be taxed,” added Reddy.
From when should you start accumulating pension?
Saving for your pension should be a habit that is cultivated from an early age. Parents should seek to instil a good sense of personal finance education within the home and subsequently their children.
“South Africa struggles with a lack of savings culture due to the fact that many of our citizens live in poverty and day-to-day expenses are top priority. So starting to save from a young age helps us to get into the habit of budgeting and being disciplined with ourselves, where this is possible,” remarked Reddy.
Pension savings have the added advantage of preferential tax treatment and are usually protected from creditors.
“We would be naïve to believe that everyone can save to the maximum allowable rate when they begin working (as typically you are paying off student loans, buying a car or a house, or helping younger siblings through high school or university), but this is definitely a case of the earlier the better – if not only for the benefits of the structure of a pension fund itself, but also for the discipline it instils. It’s far more difficult, to ramp up your savings in future, once you’ve become accustomed to a certain lifestyle, than to live within your means,” Reddy said.
Employer responsibilities
Employers have a ‘complex but crucial’ role to play in pension funding and building of their employees.
“Employers, and their HR professionals, are typically the first line of communication when it comes to retirement savings and other employee benefits such as disability and death benefits. Not only does this place a large responsibility on them in terms of education, but it often means that they are looked to for advice which may well be beyond their scope of expertise. It may then be in the employer’s best interest to outsource this role rather than attempting to answer all questions, and provide advice, themselves,” explained Reddy.
In addition employers have a role to play in setting up defaults. “We see the vast majority of members still relying on defaults due to their own apathy or lack of knowledge, and therefore an employer setting the default employee contribution rate at the minimum amount may be perceived as the “okay amount” for a member to contribute.
“This may not have been what the employer intended. Similarly, investment portfolio defaults may be chosen conservatively, and members could interpret this as appropriate for their specific situation,” added Reddy.
The employer ultimately has a large and direct influence on employee pension funding and building.
“While it seems counterintuitive that a company would want to assist a person leaving their company, it can contribute to the company’s overall value proposition and perception in the market. 47% of members surveyed in the 2015 Sanlam Benchmark Survey said they were simply provided a withdrawal form from HR when they left their company, nothing else was done.
"There is, of course, the bigger picture of wanting people to retire well, and with sufficient capital to live off in retirement, and this too may motivate employers to take action,” highlighted Reddy.
Tips for the employee
Due to the confusion around proposed changes to legislation, many employees are under the impression that pension saving is being forced onto them.
“This isn’t the case. It is important for employees to equip themselves with the facts, but also to understand what the proposed changes were trying to achieve.
“If anything, the proposals by National Treasury should highlight to us the importance of planning – particularly of acknowledging that savings through a pension fund are meant for retirement, and not as a rainy day fund or a general savings account. National Treasury has made some effort to ensure savings vehicles to cover “rainy day” events and general savings are available through the introduction of Tax-Free Savings Vehicles,” informed Reddy.
Employees should use this as an opportunity to approach their employers, in better understanding their pension savings options.
“For younger members especially, preservation may seem trivial. A few thousand Rand that you would rather use towards a bond or a car. Indeed, many administrators may encourage you to provide them with banking details as soon as HR informs them you are leaving the company in order to make a pay-out.
But take the time to understand what the forms mean, and what the implications of your choices are for your future self, before making them. It will pay off in the long run,” concluded Reddy.