Retirement savings ‘paperwork’ matters when you change jobs
The prospect of a new job often goes hand in hand with the excitement of a new opportunity. But it also goes hand in hand with moving your retirement savings, which can be an administrative challenge given the many forms and options you face. Many HR consultants also battle to help and may not legally be allowed to provide financial advice about these decisions. In the first of a series of articles, we therefore try to answer some of the common questions many people have about saving for their retirement.
The different retirement savings options
By offering retirement savings options to employees, employers play their part in contributing to your retirement prospects. Employers who make such options available will usually offer either a:
1. pension fund,
2. provident fund, or
3. group retirement annuity.
The table below highlights the differences between these three options, taking into account the retirement reform changes that will be implemented in March 2015. It is really important to point out that there is no such thing as the perfect choice or a right or wrong answer when it comes to these options. The important thing is to choose what is right for you once you understand your options. It is also important to consider the upcoming retirement reform changes. If you are uncertain on which option to choose, you should get advice from a professional financial adviser.
Based on the similarities and differences between the options shown in the table, we can make the following conclusions:
- Provident funds are currently more flexible than pension funds as employees can choose to take all their benefits as cash on retirement. However, from 1 March 2015, this will change. Employees will only be allowed to take part of their benefits in cash.
- Pension funds are more tax efficient when it comes to employees’ contributions towards the fund, but this is also subject to change from 1 March 2015.
- Group retirement annuities generally do not offer any risk benefits.
How much should you save for retirement?
South Africans generally save too little. Most people also start saving too late, which is why statistics claim that only 6% of South Africans will retire comfortably.
The simple answer to the question of how much to save is that you should save as much as you can afford to while paying for your current compulsory and leisure expenses. Your primary aim should be to ensure a comfortable retirement for yourself and your family. This means that you should plan your savings according to the goals that you have.
Current research suggests that aiming to replace 75c in retirement for every R1 that you earned in your last paycheck should enable you to retire comfortably. In most cases, this means that your total contribution toward retirement savings should be at least 15% of your income if:
1. you begin saving early enough (at the start of your career), and
2. you diligently preserve your savings with each job change.
If these two requirements do not hold true for you, you may need to increase your level of savings.
To make the best decision, get advice
For some employees that haven’t yet started saving, an occupational retirement scheme is good in that it compels you to save. It is easy to put off difficult decisions, but we encourage you not to allow the complexities of retirement savings choices to discourage you from saving. It also helps to get the peace of mind that comes from getting an expert to share their knowledge with you, and help you decide what option may be best for you, in the form of financial advice.
More on retirement savings next quarter
The questions addressed in this article are only the beginning of the retirement savings journey. In future editions, we will discuss:
- What are the different underlying investment strategies?
- Which may be best for your needs?
- If your maximum fund contributions may not be enough to meet your needs, how can you make additional provision for your retirement by saving outside your retirement fund?