Proposed Retirement Reform in South Africa
What effect may such restrictions have on South Africans living abroad who have active retirement investments back home? Summed up in one word. Restricted!
As a South African non-resident you don’t want to be prescribed what you’re allowed to do with your investment proceeds if not retiring in South Africa, which may leave you with not enough money to retire in your new home country! What now? Isn’t it time to think about moving your retirement investments closer to your new home country?
Proposed retirement reform in South Africa
The South African government, via the National Treasury, has called upon the public and interested industry stakeholders to actively participate in a debate on improving income provision in retirement “to assist South Africa in building a fair and sustainable retirement system.”
Simon Pearse, CEO of Marriott Income Specialists, is up to the challenge. Commenting on the raft of discussion papers he observes: “National Treasury is serious about its retirement industry reforms and is progressing the debate at breakneck speed… We do not think that their latest proposals will be allowed to drift for years – change is going to happen fast and hard”.
Marriott’s views and fundamental concerns with Treasury’s proposals are informed by extensive and comprehensive research. “Treasury’s proposals have far-reaching implications for every element of this industry bearing in mind they only refer to compulsory savings such as pension funds, provident funds, retirement annuity funds, preservation funds and then ultimately where that money goes when a person retires, which is predominantly today into living annuities,” says Pearse.
So, the compulsory side of retirement funding and income provision is under the microscope. “The discretionary side you can still do whatever you like with, provided you adhere to tax rules,” he adds. What are Treasury’s gripes with the compulsory side of the industry?
There are three fundamental concerns. First – the retired individual’s dependence on the state. Government does not want aged people to be dependent on them in the future because there is simply not enough tax revenue to go around. An obvious requirement of their proposed intervention is therefore that retirement savers do not spend their savings prematurely or too quickly during retirement.
The second and third issues focus on the popular post-retirement income solution known as a living annuity. “Living annuities require choices that are too complex for the majority,” says Pearse. “It is complex for both advisor and client to understand what they are dealing with”. Treasury is serious about reducing this complexity by reducing choice. Another major problem is that living annuities allow clients to increase their current consumption without regard to future consumption. The “cut your suit according to your cloth” mantra goes out the window because individuals have the ability to set an annual withdrawal rate.
Can we fix it? And can we afford not to?
Treasury outlines a number of possible fixes in its discussion papers. One of these is the certification of a default retirement product by Trustees of retirement funds. “All retirement funds already look pretty much the same,” notes Pearse. “They all fall under the Pension Funds Act and are all under the control or management of a Board of Trustees”. These Trustees will have the power to define a default product that all member funds must be invested in. This proposal goes to the limiting of complex choice already discussed.
A second intervention is to impose strict guidelines on how retirees invest the mandatory two thirds of their retirement savings. Treasury would like retirees to invest the first R1.5 million of their pension or retirement annuity payout into a guaranteed annuity regardless of prevailing rates. “What this means is that nobody [or at least no retirement fund member with a reasonable capital accumulation] will be dependent on the state,” he says. He argues that R1.5 million, even with current low annuity rates, will ensure a better ‘package’ than the current State Old Age Grant (around R1200/month). This proposal could have a major impact on the industry and there is some concern among smaller product providers that Treasury will work with the big institution to find a suitable solution.
And finally – the balance of your retirement savings in excess of R1.5 million would be invested in a Retirement Investment Trust (RIT) with restricted or no investment choice. These funds would be invested along prudential guidelines… “What they are saying is that you start saving in a prudential (pension) fund and move into a prudential fund during the retirement stage,” observes Pearse. Essentially the retirement industry has come full circle, looking more and more like the defined contribution environment that was left for dead decades ago. Beware the likely implications
“We believe that Treasury is very serious about retirement reform,” concludes Pearse. “The reforms will unfold much faster than the industry anticipates, because Treasury has the bit between their teeth and really want reforms to take place”.
Another comment made – National Treasury is tackling the savings shortfall from the wrong angle. They say it does not help to regulate what happens to accumulated retirement savings when the problem is too many people reach retirement without any savings at all… Should Treasury focus on the run up to retirement to ensure more South Africans make sufficient provision, should they regulate post-retirement income investments, or both?
If you would like to start the process of finding out how much you have in South Africa, and how to get it here, along with how much it will cost you, please contact Debi at Sondergaard Accountants, and we will organise a free, no obligation report on your behalf.
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