Financial planning doesn’t end at retirement. When you retire, you can invest your savings with an investment company of your choice. These were just two of the retirement hacks shared at a recent Money Cents webinar. Chatting to personal finance experts were former journalist, Bruce Cameron, and financial planner, Wouter Fourie of Ascor Independent Wealth Managers, who have co-authored The Ultimate Guide to Retirement.

South Africans are notorious for their poor saving habits, so much so that Absa’s economists reported that household savings turned negative in the first quarter of this year, for the first time in three years. 

Experts say that only six percent of South Africans are likely to retire comfortably, as many either fail to save for retirement or cash out their retirement savings when they change jobs.

“The Covid years will have had a long-lasting effect on retirement because so many lost their jobs or got paid less. For two years, both employees and employers were contributing less to retirement funds, and most of those who lost their jobs have not been able to find employment again,” Cameron says.

He notes that people don’t save enough for retirement because the immediate need to feed a family tends to be a bigger priority than saving for “someday” in 15 to 20 years.

The six percent statistic usually refers to somebody that expects to receive the equivalent of 75% of their final salary as their monthly income after retirement. 

National Treasury and financial regulators have recognised that the poor savings culture translates to an increased burden on the state. 

The social old age grant is R2,080 a month, increasing to R2,100 if you are older than 75. However, your income must be less than R86,280 if you are single, or R 172,560 if you are married.

Changes in retirement fund legislation

Some of the retirement fund legislation that has been introduced includes the standardisation of tax deduction benefits across different types of retirement funds, ring-fencing two-thirds of members’ retirement savings, and introducing the two-pot retirement system from March 2024.

You can now claim a tax deduction on your retirement savings, regardless of whether you are contributing to a provident fund, pension fund or retirement annuity. However, the deduction is limited to 27.5% of your taxable income, up to a maximum of R350,000 a year.

During the Covid pandemic, it became apparent to retirement funds and legislators that South Africans needed improved access to their savings in dire emergencies. 

To address this, the two-pot retirement system will be introduced from 1 March next year. 

“One of the biggest problems the retirement industry has identified is people resigning from jobs just to access their retirement savings. The two-pot system will allow you to access one-third of your contributions from 1 March next year, and the remaining two-thirds will be ring-fenced for your retirement,” Cameron explains. 

According to Old Mutual, more than 90% of retirement fund members currently exercise the option to withdraw all of their retirement savings when changing jobs, instead of transferring the money to a preservation fund, a new fund or simply leaving it invested with the original fund.

 Fourie says, as a financial planner, he would caution that when the two-pot system comes into effect, the idea is not to draw down from your retirement savings annually.  

First, that withdrawal will result in you losing all the compound growth that you would have benefited from on that money. Second, there is a tax consequence. 

Currently, if you wait until retirement to access your savings, the first R550,000 is tax-free. If you decide to withdraw your retirement savings early, the tax-free portion drops to R27,500. So, for example, if you withdraw R300,000 “early” at the age of 45, the tax-free portion will only be R27,500 and the tax-free portion when you finally retire drops to R250,000. 

The taxes are even more punitive under the new two-pot system. 

National Treasury’s draft legislation states that retirement fund members will be able to access “seed capital” – or a portion of their available balance – immediately. The seed capital will be a minimum of R2,000 or 10% of your savings in the “vested component” as of 29 February 2024, capped at R25,000.

Withdrawals from the accessible pot will be taxed at your income tax rate, which immediately makes withdrawals a less attractive prospect for those in the higher income tax brackets. This means, for example, someone paying income tax at a rate of 36% and who wants to withdraw R25,000 on 1 March next year, would pay R9,000 tax and only withdraw R16,000.

Save as though you will live to 100

One of the scarier statistics in the Ultimate Guide to Retirement is the fact that longevity has improved, meaning your money needs to last you almost as long in retirement as the number of years you worked. 

Cameron says you should assume that you will live to 100. 

The book states: “In South Africa, if you and your partner are now both aged 65, at least one of you has a 99% chance of living to age 70, a 98% chance of living to age 75, a 91% chance of living to 80, and a 47% chance of reaching 90.” 

Whereas the thinking once was that you need to spend four years working for every one year in retirement, it is now closer to two to three years working for every one year in retirement. In a nutshell, you either have to start contributing more towards your retirement savings or you need to plan to work longer.

“One of the mistakes people make is setting their eyes on retirement as the end goal. They incorrectly assume that financial planning stops when they retire. The reality is that financial planning continues until you die,” Fourie says. 

He recommends that you pay yourself first when you draw up a budget so your retirement savings are prioritised before you get fancy clothes, a new haircut or the latest car when your five-year-old sedan is just fine. DM