Retirement and savings in South Africa
Knowing whether one has saved enough for retirement is one of the primary causes of financial anxiety for pre-retirement investors. The current investment environment, characterised by economic uncertainty, coupled with a choice of over 1 000 unit trusts and a myriad of different products, has made it increasingly difficult to make informed investment decisions, according to Marriott Investments.
A good retirement plan must take the following into account – inflation, tax, estate planning and long-term healthcare needs, and their impact on savings and the unexpected. This would include how much income ones’ savings will generate in retirement and whether: is saving enough today able to sustain ones’ lifestyle in the future.
Good estate planning should include writing and updating a will, naming beneficiaries for all accounts, and setting up a power of attorney in case one becomes incapacitated.
The possibility of needing long-term care or assisted living at some point in ones’ lifetime is high and care is not cheap. The average cost of long-term care for a month can start at R30 000 per month. Medical Aids will not necessarily cover these expenses unless there is clear medical necessity and motivation – and there again there will be a limit on the number of days that can be claimed. Building long-term care expenses into a retirement planning is a necessity in South Africa.
South Africans are understandably concerned that rising inflation and further currency depreciation could result in their retirement savings diminishing in real terms. Essentially one must assume that retirement savings will lose the inflation rate of their value annually.
IMF estimates for the 5-year period of 2017-2022, indicate South Africa’s inflation is forecast to average 5.6%, compared to far lower estimates for developed countries like Germany and USA, forecast to average 2.1% and 2.4% respectively. Thus, retirement investments must be able to beat inflation.
Investing in funds that will provide a tax-free pay out: ie: RAs and TFSAs, is also advisable. The South African National Treasury introduced TFSAs (tax free savings accounts) in March 2015 to address South Africa’s notoriously low savings rate.
A TFSA is the only investment vehicle allowing one to avoid all taxes that can apply to savings – ie: tax on interest earnings and tax on dividends. Investors are allowed to invest a maximum amount of R 33 000 per annum, with a life time cap of R 500 000. The effect of compounding and low fees can show a substantial tax saving over time.
There are 5 types of TFSAs: Cash accounts, stockbroker accounts, unit trusts, life insurance policies and
Waiting until one retires will lead to monetary and lifestyle sacrifices but it is never too late.
The Schroders Global Investor Study 2017 – a survey conducted by global asset management firm, Schroders, of over 22,000 wealth investors in 30 countries – has found that non-retired investors in South Africa feel they should be saving 17.8% of their income each year, to live comfortably in retirement – a lot more than they currently do (12.2%), and significantly higher than global investors savings (13.7%), on average.
The driving the need for higher retirement savings among South Africans is that state benefits in the country are considerably low. Only 5% of South Africans are dependent on state pensions, compared to that of the global average (19%). South Africans tend to depend on private investment vehicles such as company pensions (24%), personal pensions (17%) or other savings and investments (22%), to save for their retirement.
SA Retirement facts
- South Africans on average spend 75% of their take-home income paying off debt.
- Almost 90% of South Africans spend more money than they earn.
- 58% expect to continue to work for pay after formal retirement and for the majority, this will be due to financial necessity rather than choice.
- 62% of South Africans say they are not coping in the current economic climate.
- Only 54% of South African who are currently 10 years or less away from retirement age are saving for retirement.
- Pension fund members look to their pension to provide 64% of their income, indicating a heavier reliance on formal retirement.