Saving appetites have decreased during the pandemic. This is largely because of the tough time we have all been through over the last year. For some, this was because of affordability. For others, they have adopted a spend now and save later, a ‘spoil yourself’ type of thinking. This is okay for a season, but it is important that we all get back on track with our savings plans. ‘This too shall pass’ and when it does our retirement will still be waiting for us.
The pandemic which resulted in the ensuing economic crises across the world has largely impacted immediate household income streams. This has not only affected financial wellbeing in the now, but also is bound to be felt in the long-term as well. We are going to take a deeper look at this specifically with what happened to retirement contributions during this time.
The reality is that this whole event presented some households with a rather challenging choice. Those who have felt the financial pinch during this time were given a trade-off decision: making ends-meet today versus saving for the future. While this reason for the shift away from contributions toward retirement is understandable, it does have significant hidden implications we might not have known.
Firstly, that our short-term choices impact our long-term lifestyle. Naturally, decreasing contributions or stopping them entirely will result in a lesser amount to live from in the future. Secondly, and often overlooked, is the tax implications. There is a tax benefit we receive when saving toward retirement. This is sort of a ‘well-done high five’ that the government provides us with. Why ‘well done’? When more people can look after themselves in retirement, it releases pressure from the state to do so. In reducing or pausing our retirement contributions, we increase our taxable income. Ultimately, we pay more tax on the same amount of income, simply because of the elimination of the tax benefit. So, even in the short-term, we are getting less out.
Both of these factors weigh-in strongly for the long-term impact on our retirement.
How do we ensure that we don’t outlive our savings? Many of us would like to live long-full lives filled with experiences. Retirement should be the best time of our lives considering we have worked hard toward it. It might come as a shock to some, but if you retire at 60 you could still live another 20-30 years. That’s a decent amount of savings that will be needed. The earlier we start planning for retirement, the better.
In another article Retirement Done Right, we focused on 4 investment hurdles we can be aware of when saving toward retirement:
1. Delaying investing/saving because of a lack of understanding.
2. Delaying investing/savings thinking you are too young to start.
3. Saving, but not enough. How much is enough?
4. Early Withdrawals from retirement savings and the impact.
In your spare time, have a read through this and empower yourself with these simple considerations.
Even before the pandemic hit household incomes, many South Africans were already pressed to save enough toward their retirement. In general, South African’s have a poor savings culture. The pandemic has simply compounded the existing issue. It is estimated that only about 6% of South Africans can afford to retire at 65. This leaves the majority of South Africans in the gap of living longer than their retirement savings.
The latest Taxation Laws Amendment Bill came into effect on 1 March 2021. Before this amendment, we were able to take 100% in cash at retirement. This not only defeated the purpose of having a tax benefit because the tax on 100% lumpsum is heavy, but also most people did not correctly steward these retirement finances. This left them with little-to-nothing to actually live from in retirement. In summary, the amendment bill has the following implications:
Members of all retirement funds will only be able to take one-third of the total value of their retirement fund interest as a lump sum while the balance can be taken as an annuity.
The restriction will only apply to amounts contributed to funds on or after 1 March 2021 and not to members who are close to retirement (55 years and older as of 1 March 2021); provided they remain in the same fund.
We have taken the time to write out some tips for saving for retirement as well as helping your stretch your retirement savings while in retirement. Please have a read through this in your spare time.
– Cephas Dube & Kheara Lugg