Some 43% of retirees around the world are concerned that their retirement savings are insufficient to retire comfortably, while 51% of employees globally worry that their company scheme is insufficient for their future needs, according to the World Economic Forum. This is made worse in emerging economies, such as those in Africa, where day-to-day financial pressures and expenses cut into long-term savings plans.
In South Africa, National Treasury estimates that only 6% of people in the country can afford to retire comfortably. Compounding this problem is the fact that the majority of South Africans - about 90% according to research from Alexander Forbes – are reliant on workplace schemes for their retirement savings and the corporate vehicles in place to manage these essential savings. These funds are accessible whenever an employee leaves a job, meaning that many individuals derail their retirement saving efforts by taking out some, or all, of their accumulated savings when changing jobs to cover day-to-day expenses or to settle debts.
In Nigeria, Africa’s biggest economy, only about seven million people out of some 69 million employed have a pension. That’s around 10% compared with more than 70% of working-age people in the United Kingdom and over half in the United States. Saving for retirement in Nigeria is impacted by the country’s co-funded pension system, which requires contributions from employers and employees but which meets resistance from many employees who object to having monies needed to live deducted from their salaries.
In short, when the opportunity to access lump-sum retirement savings presents itself when moving companies, many individuals in Africa choose to tap into these funds.
In an ideal world the holder of a retirement annuity or pension fund would not withdraw their retirement savings to pay for daily expenses, to start a new business or to pay off debt. Having already amassed a lump sum, the smartest move is to keep those funds hard at work earning interest without interfering in the long-term work of compound interest.
One of the ways to keep on track when changing jobs is to transfer the proceeds from a current retirement fund into a preservation fund; a flexible vehicle which allows you to make one withdrawal of up to a third of the value before retirement (but only from age 55) while still ringfencing the funds for their original intention: your retirement. You can also choose to open a retirement annuity, which has certain tax benefits but only allows you to access the funds by age 55. Or you can choose to transfer the savings to your new company’s retirement fund.
This preservation mindset also delays the need to pay tax on withdrawals, since only R25 000 of this lump-sum pay-out is tax free and everything above that is taxed according to the applicable tax bracket and amount (see table).
Understand the legal ins and outs
The tax implications of cashing in a pension or retirement annuity will differ from country to country, so speaking to an expert is always advisable before making a decision. This is particularly true in South Africa at present, given recent changes to the Taxation Laws Amendment Act.
One of the biggest changes is that provident funds and corporate pension funds are now treated the same in that, on retirement, members must use at least two-thirds of their retirement benefit to buy an annuity, from which a future retirement income will be drawn. The only exception is if the total benefit is less than R247 500, in which case the entire lump-sum can be withdrawn. If provident fund members were 55 or older on 1 March 2021 then they are still entitled to withdraw their full retirement savings as a lump sum, as was the case previously.
However, National Treasury has been clear that its focus lies in encouraging the preservation of retirement funds, rather than enabling early withdrawals. In a Q&A document explaining some of the implications, Treasury noted: “People tend to change jobs a number of times in their working lives. Every time an employee changes employment, they cash in their accumulated retirement savings, thereby retiring with insufficient retirement benefits. Cashing in before retirement also prematurely erodes security in old age, undermines the alleviation of chronic poverty and increases reliance on others.”
Retirement reforms are, therefore, aimed at supporting retirement saving efforts which will, ultimately, be to the benefit of individuals, their families and the fiscus.