Planning best for saving

2012-06-30 11:56

While we are becoming more aware of the need to save for retirement, financial pressures and human behaviour prevent us from making the right decisions, according to the latest results from the Old Mutual Retirement Monitor.

The survey, which included interviews with 1 000 South Africans across various income groups and ages, saw a marked improvement around the general awareness of the importance of retirement savings; however industry statistics show that around 90% of people cash in their funds when leaving their employer.

The Old Mutual survey suggests that people would prefer to preserve their retirement funds with 81% indicating that if they were to leave their company in the future they would not take the cash and 62% saying they would preserve their pension if they were retrenched.

However, it seems that when the crunch comes we opt to take the cash – usually to settle debt.

Forty-five percent of the respondents said that they would use their retirement cash to settle debt and 17% would use it to pay for living expenses and furniture and appliances.

Interestingly 43% said that they would not spend the money but invest it in a short-term fixed deposit.

The choice to invest in short-term vehicles would appear to be counter-intuitive as firstly tax is paid on retirement withdrawals and retirement savings should be in a long-term vehicle invested in growth assets.

However Hugh Hacking, Head of Retirement Fund Solutions at Old Mutual, says the survey showed a significant shift towards shorter-term savings goals in general such as paying off debt, saving for a house or car and appliances.

This has resulted in a decrease in the number of people saving through longer term savings plans such as endowment policies and insurance-linked products.

Unsurprisingly the survey showed that lower income people have far more pressing needs than saving for retirement as they focus on meeting day-to-day challenges and that retirement savings are by and large a luxury they cannot afford.

The requirement of lower income earners to fund shorter term needs and a general trend toward shorter term savings may challenge National Treasury’s plan of making preservation of retirement funds compulsory.

The survey suggested that there may be other ways to encourage people to preserve their pensions.

Those people who received advice tended to opt for preservation while 89% of people who made their own decisions opted to cash-out which suggests that good advice plays a critical role in retirement savings.

Therefore it is very concerning that only 34% of respondents had received any advice from their fund or employer when leaving the fund despite this being an opportunity to educate members on making the right financial decisions.

Another trend is the increase in the importance of saving for education.

While younger people tend to focus on savings for cars and homes, individuals between the ages of 35 to 49 focus on saving for children’s education.

Hacking says there is a growing realisation that the cornerstone of wealth creation is education.

“You can never build wealth without education, so people are realising that they need to provide education in order for their children to have financial stability,” says Hacking.

This will be another interesting challenge for our policy makers around the National Social Security Fund as many families view investment in their children’s education a form of retirement funding.

With limited resources families will struggle to educate their children as well as provide for their own retirement.

While individuals recognise the importance of education for long-term prosperity, Hacking says the same connection has not yet been made in most people’s mind around savings and wealth creation.

A figure that remains constantly surprising is that a third of people across all income brackets believe that the state will take care of them in retirement.

Currently the government only provides a basic pension of R1 800 monthly to people who have a retirement income of less than R45 000 a year and would therefore not be available to most middle income South Africans.

For those that realise that there is no state support and that their current retirement provisions are not sufficient, the only solution may be to work past retirement age.

Hacking says this is leading to an increase in the number of people who believe that they would have to work past retirement age.

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