At the 2015 Sanlam Benchmark Symposium, it was revealed that only one quarter of South Africans will be able to maintain their standard of living in retirement. There are a number of reasons for this, including lack of preservation and lack of understanding.
People need to be more involved and engaged with their various retirement plans, and understand the impact that the decisions they make have on their investments.
“The chance to actively participate in decisions and make choices regarding one’s retirement planning is an enabling and empowering opportunity which should be embraced by individuals. It can greatly influence the outcome of one’s retirement planning to ensure that the result ultimately suits every individual,” explained Karin Muller, head of Sanlam Growth Markets.
Preservation
Mayuri Reddy, marketing strategist at Sanlam Employee Benefits, noted that lack of preservation is one of the challenges facing retirement funds.
The problem is that the preservation of retirement funds is competing with people’s self-preservation.
Sanlam’s results indicate that 69% of respondents do not preserve their retirement benefits, and therefore do not have enough invested or have insufficient time to save for retirement.
Muller noted: “Almost 60% of retirement fund members, who withdraw their benefits, took the full amount in cash. The bulk of the money was used to reduce short-term debt (51%) and fund living expenses (33%).”
Reddy explained: “The survey results indicated that many people are not aware of the tax implications of non-preservation (49% of members surveyed), nor do they fully understand the impact on their retirement outcomes (45%).”
Of those respondents who had not preserved their retirement funds, 39% regretted this decision.
“The responses show that retirement fund members make financial decisions that have a significant impact on their retirement situation without properly understanding the implications of their decisions.
“For example, only half of the members surveyed indicated that they were aware of the level of tax they would pay. About half realised the effect withdrawal would have on their retirement outcome, and 39% regretted the decision to withdraw, bearing in mind the level of tax which they paid,” revealed Muller.
Communication during induction
According to the survey results, there is a discrepancy between what employers believe is communicated about retirement funds at induction and what the employees believe is highlighted during the presentation.
According to employers, 74% believe that the member is responsible for the defined contribution (DC) fund. Sixty-five percent of employers believe that they provide their employees with the knowledge of where and how to access more information, and 53% believe that they highlighted the importance of preservation during the induction.
The employee perspective is quite different. According to the results, employees believed that the following was covered during induction:
· 36% believed that retirement savings was not covered
· 57% stated that the benefits of starting to save early was highlighted
· 53% noted that tax benefits were covered
· 19% said that investments were discussed
· 12% believed that preservation was covered
Communication when leaving the company
When an employee leaves a company, the results of the survey indicate that only 78% of employers provide members with information when they want to withdraw. While only 25% of employers “have procedures and forms specifically designed to encourage preservation,” highlighted Reddy.
Furthermore, only one in ten employers “communicate to members specifically before periods of unemployment with a tailored message,” according to respondents.
Fifty percent of respondents indicated that their employer simply “provided them with a form and did little else to encourage preservation.”
When the employee starts at the new employer, respondents revealed that one in four employers “have forms and procedures designed to encourage members to bring over their previous savings.”
According to 70% of the trustees surveyed, “non-preservation is the biggest mistake a member will make during their retirement savings journey.”
Many of the presenters at the Sanlam Benchmark Symposium 2015 noted that employers need to engage more with their employees about the impact that their decisions with regards to retirement can have.
This includes accessing your retirement funds before retirement age to cover immediate expenses, and only starting to save for retirement later in life. In both of these situations, you will have less when you reach retirement, than if you had left your retirement fund untouched and invested over the long term, making it harder to maintain your lifestyle.
Reddy stated: “Members must realise that dipping into their retirement savings - which they are effectively doing by not preserving - is like borrowing from your future self, at a very high interest rate and with no intention of ever paying it back. We need to start being more self-disciplined with our finances in order to have a self-sufficient and enjoyable retirement.”