There are issues columnists need to cover as a matter of public service. For me, pension preservation is one of them. There is finally talk of some restrictions coming in after decades in which South Africans have been able to cash out their retirement fund pots every time they change jobs. Ideally, everyone should be made to preserve their capital.
It is widely accepted that people need to contribute 17% of their income every year for 40 years to have a comfortable retirement.
This is defined as a pension equivalent to at least 75% of the final salary, known by actuaries as a 75% replacement ratio. Under the old defined benefit schemes, anyone who worked for 30 years at the same company was guaranteed to get this.
But we don’t live in the days of spending an entire career at one company and retiring with a gold watch. The idea looks quite bizarre to the millennial generation, which expects to have several different careers, never mind jobs.
But the temptation to cash in a full pension pot after leaving a job is too tempting — and sometimes it is necessary. According to Alexander Forbes, at least 14% of its members who are working but under 30 have loans in default; and of those in their 30s, that percentage reaches almost 5%.
The proportion of South Africans who achieve at least a 75% replacement ratio has been remarkably stable, at 6%.
It is unrealistic to expect SA to move to compulsory preservation, which is the norm in the EU — at least until the country builds up a social security safety net comparable to those (far richer) countries. So the National Treasury’s "two bucket" system, which is likely to cap any withdrawal at one-third of accumulated capital, makes sense.
Staying at work longer and postponing the first withdrawal are the surest ways to boost your pension income
Under this system, you can access a chunk of your pension, as long as the other portion remains inaccessible before retirement (between 55 and 65).
Natasha Huggett-Henchie, an actuary at NMG Consultants, gives two useful illustrations. Under the current regime, a fund member starts contributing at 20, changes jobs every seven years and withdraws the full benefit every time. It is only when they turn 50 that the member decides to preserve what they accumulate. But 50 is too late, and the member can’t expect more than a 15% replacement ratio — seeing a R60,000 monthly income fall to R9,000.
But under the new rules — with the withdrawal capped at a third — and even accessing that maximum withdrawal limit every five years until 65, the member will be better off, ending up with a 36% replacement ratio. That is still not enough, but at least it protects the serial withdrawer from the worst consequences of their behaviour.
Double the pension pot
The Alexander Forbes Member Watch shows that just 8.8% of members preserve their assets when they change jobs. But it looks more encouraging when expressed in total assets, at 48.4%: at least this means many people who have accumulated sizable lump sums see the value in preserving them. The bad news is that it is going to be more expensive to buy a pension. It has to last longer as most people are living longer, and over time real yields, which determine the price of pensions, are falling. People are also retiring earlier.
According to Forbes, the actual retirement age in most sectors is now below 62. Yet staying at work longer, still contributing to the fund, and postponing the first withdrawal are the surest ways to improve the replacement ratio.
In fact, retiring at 65 instead of 55 could mean doubling your pension.
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