Saving for your future self

By Mayuri Reddy, Sanlam Employee Benefits

The recent Sanlam Benchmark survey reveals that employees are not fully aware of the impact of their decisions on their future. Why is this so and what can be done?

According to the research results of our 2015 Sanlam Benchmark Survey, only a quarter of South African retirees are expected to be able to maintain their standard of living in retirement.

Why?

The two main reasons for this dismal statistic are:

1. Retirement fund members cashing in on their savings after retrenchment or resignation, and
2. Apathy towards making provision for their own retirement.

Not preserving retirement savings when changing jobs or becoming retrenched is one of the biggest mistake fund members make on their retirement savings journey.

The survey results indicate 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%).

Another big decision which fund members are not engaging with is understanding the investment decisions that are made either by the trustees of the fund, or by the member themselves.

Of the 42% of members invested in their fund’s default investment portfolio: the majority (70%) did so because they trusted the trustees of the fund to make sound investment choices – but a staggering 87% said they had not voted for the trustees and 75% could not name a fund trustee.

The second most common reason members gave for investing in the default portfolio was to achieve growth, and they were not overly concerned with exactly how they were invested to do this.

72% never come back to reconsider their initial decisions regarding their retirement benefit options which they make during their first few days of employment.

The member apathy that is apparent from the reasons given for being invested in the default investment portfolio, together with the fact that few members will revisit their retirement decisions during their working lifetimes, means trustees are taking on huge responsibility for ensuring that members are appropriately invested at various stages of their lives.

As a result, we see many trustees (61%) using life stage investment strategies as the default option to provide younger members with sufficient exposure to growth assets, while ensuring that members closer to retirement are not exposed to excessive risk.

Unfortunately, members also seem to be relying heavily on trustees to ensure that they are on target for a comfortable retirement – for every 10 members, only three know their fund has a stated target amount of savings they should be working towards (typically this amount is capital sufficient generate an income of 70 – 75% of pre-retirement income), and of those three only two know what the stated target pension is.

One of the key messages that emerged from this year’s results is the crucial importance of a retirement fund, and the need to consider alternatives to ensure members are not forced to tap into these funds. An outstanding 85% of members would not opt out of compulsory savings through their retirement fund if given the option, and similarly 89% would not reduce their current contribution rates if given the option, indicating an appreciation of this benefit. However, 77% of members who withdrew from a fund due to retrenchment or resignation took some or all of their retirement benefit in cash. Much of this is because 36% of members (moving upward from 25% in 2014 and 21% in 2013) have no other personal savings aside from their retirement savings, and when faced with access to a large lump sum of money, see this as a great windfall.

The non-preservation of retirement funds is having a huge impact on people’s retirement outcomes – however, we can’t just ignore people’s short-term financial needs. Members should be considering using Tax-Free Savings Vehicles, a new product line launched by various providers in March this year, to fulfill the purpose of savings for emergency situations, rather than viewing their retirement savings as this. Unfortunately, only 31% of members surveyed were aware of the existence of Tax-Free Savings Vehicles, and of those are aware of the product, only two thirds are considering making use of it.

Pensioner study results
The behaviours being exhibited by members on preservation and apathy towards their retirement savings choices results in poor outcomes in retirement. We look to our pensioner study for a glimpse into the future for members:

62% of pensioners experienced a reduction in income at the point of retirement, while only 43% believe they have sufficient capital to last for the rest of their lives.

On top of that, 66% of pensioners still have either adult or child dependents who rely on them financially.

Regarding non-preservation:

• Of the pensioners who had withdrawn from a retirement fund through resignation or retrenchment from their previous employer, 74% took some or all of their retirement benefit in cash. Only 54% of pensioners indicated that they regretted the decision to withdraw, while 41% said they could have considered an alternative option.

Regarding debt:

• 57% of pensioners who did not preserve their retirement benefits at withdrawal used it to reduce debt, while a concerning 43% of pensioners are still paying off debt in retirement.

Regarding advice:

• On average, pensioners first received financial advice on retirement 10.5 years before retirement.
• Only 24% were advised to consider converting their risk benefits from a group policy to an individual life policy at retirement (in order to benefit from possible preferential rates).
• 44% sought retirement advice from their financial adviser or broker, while 41% turned to their employer or HR officer for advice.

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.

The recently introduced Tax-Free Savings Vehicles could go a long way towards creating awareness that there are other ways to address these needs without dipping into retirement savings, but members also need to start saving for the needs of their future selves rather than spending on their current wants – there are other ways to address these needs without dipping into retirement savings.

 ‘Members must realise that dipping into their retirement savings – which they are 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.’

Sanlam Life Assurance Company (Ltd) is a licensed financial services provider.