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In the past year, the retirement industry has experienced major tax changes with two legislative amendments being of particular importance. The first major change in regulation relates to the alignment of the tax handling of retirement funds, commonly referred to as “T-day”, which affects provident funds, pension funds, preservation funds and retirement annuities (or RAs). Part of the regulation pertaining to the annuitisation of provident funds has been postponed for two years to 2018 following opposition by union representatives. With effect from 1 March 2016, tax deductions relating to contributions to all retirement funds were thus changed and the tax deduction is now defined as 27.5% of the greater of taxable income or remuneration, up to a cap of R350 000 per year. The biggest challenge still remains financial literacy around the handling of savings before and after “T-day”.

The second major regulation change was the introduction of the tax-free saving accounts, commonly referred to as the TFSA. The industry has seen numerous providers taking up the initiative to offer TFSAs with reported uptakes being promising, especially among the younger generation, who are hopefully saving with a longer-term goal in mind. Intermediaries find this space challenging due to the limitations of fund choices and the younger generation’s perception of RAs being fraught with stories of bad experiences and of their parents being “ripped off”. This is important and highlights an opportunity for intermediaries and providers alike to collaborate and develop a strategy to help support the younger generation to start saving for retirement today.

Furthermore, evidence from the focus group results suggests that there is a shift in behaviour among members and advisers. Technology such as robo-advice, social media and YouTube are high on respondents’ list of financial planning tools with the limitation of employee engagement and user sophistication being raised as key concerns. Other points raised were around employee wellness, default strategies and the debate around active vs. passive investment management. Many of these points have been mentioned before but the industry is facing renewed pressure to drive costs down and offer value added products so that employees maximise returns on their savings for retirement with minimal risk.

Turning one’s attention to the pensioner samples, the discussion will once again be structured around the experience of two groups i.e. “core” and “booster” samples. The results of both groups are not directly comparable to previous years as the sample design has been revised by placing more emphasis on the affluent group of retirees (or the booster sample). The sample size was increased from 50 in previous years to 101 in 2016. The income threshold for inclusion in the booster sample was also increased from R25 000 per month to R39 999 per month. Inversely, the number of core group pensioners tested was reduced from 252 in 2015 to 151 in 2016. Respondents in the core group of pensioners will thus have an income level of R10 000 to R34 999 per month.

Both groups averaged 60 years when asked about the age at which they retired from formal employment. Common characteristics of the “Sandwich generation” became evident, including financial stress, as well as concerns relating to their health, job, personal relationships and time. Primarily these concerns exist due to respondents not making adequate retirement provision from a young age. Major emphasis is placed on taking care of their children’s university education while also providing financial support to their elderly parents. Retirees risk a shortfall in income and hence would need to supplement this by finding additional work during retirement.

65% of affluent pensioners, compared to 58% of pensioners in the core group, have other persons who are financially dependent on them. Respondents in both groups indicated that they have two dependants on average, where the definition of a dependant includes a spouse, children and other adults. In terms of capital provision for retirement, 58% of affluent pensioners believed that they have saved enough to last for the rest of their life compared to only 35% of the core group. In addition, 83% of affluent retirees were able to maintain a similar lifestyle post retirement than before retirement as opposed to only 53% of pensioners in the core group being able to do this.

The booster survey results provide further valuable insights into the behaviour of affluent pensioners:

  • Both groups consistently indicated that their income was not keeping up with inflation, leading to a reduction in the buying power of retirees’ post-retirement incomes
  • Affluent pensioners are less likely to experience a shortfall in income due to increased living expenses compared to the core group of pensioners
  • Most affluent pensioners save something at least every month
  • For both groups, the largest items of expenditure were groceries (food and other household products), medical aid contributions and utility bills.

It goes without saying that starting to save from an early age is an excellent springboard for a better retirement. Year on year, the message remains consistent that it is of paramount importance to start your retirement planning as early as possible. In conjunction with contributions towards a pension or provident fund, 63% of affluent pensioners indicated that they made additional contributions to an RA versus 42% from the core group of pensioners. This highlights the importance of making additional pension contributions, even if you are part of an employer’s retirement fund.

The survey results showed furthermore that the percentage of pensioners who withdrew from their retirement fund either via resignation or retrenchment was 27% and 28% amongst the affluent and core group of pensioners respectively. Among the pensioners that withdrew their savings, over 55% from both groups did not realise the level of tax that they would have to pay on the withdrawal amount. Of those that withdrew cash, 62% of affluent pensioners regretted this decision compared to 48% of the core sample. This shows that more education should be conducted to make members aware of the consequences of not preserving your retirement benefits.

The core sample placed more emphasis on reducing long-term debt compared to 38% of the affluent sample. Affluent pensioners utilise their withdrawal to reduce short-term debt to a lesser extent (31%) but rather opt to use part of it to enhance existing assets such as improvements to their home (39%). However, topping the list was the need to cover living expenses, at 46% and 41% for the core and affluent samples respectively, which shows consistently that the cost of living is a real concern for any segment of the market. As in 2015, this is also indicative of the high levels of short-term debt that South Africans have.

Moving onto the topic of financial advice, the proportion of the core group of pensioners that received financial advice on their retirement planning prior to their retirement age was 68% compared to 82% in the case of affluent pensioners. The affluent pensioners also received this financial advice much earlier, almost 11 years on average, prior to retirement versus only nine years in the case of the core group of pensioners.

A new question was introduced in this year’s survey: “In the last five years prior to retirement, what topics did your adviser discuss with you”. High on the agenda were discussions about expected income in retirement, tax implications of different investments and cash withdrawals. Rated slightly lower was performing a needs analysis and discussing medical aid options. Affluent pensioners once again had these discussions earlier than the core group of pensioners, on average 3.5 years before retirement versus 2.8 years in the case of the core group of pensioners. Among the affluent pensioners, investment guidance on investing in a living annuity was discussed more than in the core sample of retirees. When asked how they felt about having to buy an annuity in retirement, reassuringly over 80% from both segments were happy or satisfied with the decisions that were made.

Focussing the discussion on sources of income, 48% of the core group received most of their income from a pension from the employer that they retired from, compared to 35% among the affluent pensioners. In addition, income from guaranteed annuity products and investment-linked living annuities was higher among affluent pensioners compared to the core group of pensioners at 64% and 52% respectively. The affluent pensioners often also have additional income from multiple investment sources. The types of additional sources highlighted were property investments, equity-based investments and inheritance capital. Among core pensioners, savings were often used to augment retirement income, but a high proportion indicated that they sought freelance, contract or part-time work in order to supplement their income.

At retirement, pensioners who opted for a lump sum payment are encouraged to stay within the tax-free limit. Based on the survey results, the proportion of the core group of pensioners spending their lump sum on living expenses was 27% compared to using the lump sum to reduce short-term debt such as car repayments, credit cards, and loans etc. at 36%. If we compare this to the findings for affluent pensioners, 26% spent their lump sum on living expenses and 33% to reduce short-term debt. Fewer pensioners from the core group invested this lump sum to start their own business (12%) whereas a higher proportion of affluent pensioners utilised the lump sum to start their own business (21%). A concerning result seen was that 50% of pensioners in the core group indicated that they had depleted their lump sum whereas 30% of affluent pensioners had indicated the same. Retirement does not mean that saving should come to an end and it was positive to see that 62% of the core sample and 85% of the affluent sample still managed to save in retirement. However, the core sample is less likely to do so each month (16% versus 46% among the affluent sample). Investing into a TFSA is especially becoming a consideration for affluent retirees, and hopefully this trend will be seen among all of the pensioners in future.

Shifting our attention to post-retirement income products, there seems to be uncertainty about the type of product purchased by retirees to provide them with a retirement income. This is evident in that only 15% of affluent retirees and 6% of the retirees from the core group indicated that they had purchased an investment-linked living annuity (ILLA), even though the sales figures from the market would suggest otherwise. Affluent retirees stated investment and income flexibility as their main reasons for choosing the ILLA. On average, the mean income drawdown rate was 5%, with 78% of pensioners mentioning that their drawdown rate has not changed since retirement. Affluent retirees are fairly confident that they will not run out of income (79%), with 57% investing in conservative to balanced investment portfolios. This type of investment portfolio balances risk and return by using combinations of fixed income securities and real asset classes (such as equities and property) to generate relatively steady investment growth with the aim of preserving capital, thus aiding income sustainability over the long term.

When asked how they would want to receive investment and other communications, post or personal mail remains the preferred method among both samples. The affluent segment indicated a further desire for face-to-face communication, which could be seen as a possible explanation why 73% of affluent retirees would like interactions with a financial intermediary, compared to 56% of pensioners in the core sample. Family is important and most affluent pensioners indicated that they discuss their financial situation with their spouse, children and other family members.

In conclusion, the current political and economic situation is a major concern for most pensioners as this will directly impact their future retirement years in South Africa, as well as the living conditions of their families. Maintaining a positive outlook can be a challenge, but this year’s Pensioner Benchmark Survey highlighted that with the correct guidance, education and advice, this can be achieved. Regulatory changes around retirement provision will hopefully incentivise better retirement provision, which would ultimately increase the socio-economic welfare of all South Africans. The 2016 BENCHMARK results once again challenge leaders in the retirement space to work together in helping future retirees plan for a better tomorrow, today.

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