In an idyllic world, retirement is seen as a reward for many years of service. It conjures up images of endless hours relaxing in the sun and time spent travelling the world. However, in practice, retirement is a process not an event – one that often results in an identity crisis for those who struggle to transition from the occupation that may have partly defined who they are to a situation where they are solely responsible for planning their day and week. People who struggle to shift from being productive one day to retired the next may well find it difficult to enjoy their retirement years.
This mental shift is an important consideration, but further stress is caused by the fact that many South Africans reach retirement with insufficient savings to maintain their quality of existence. They are often concerned that they may outlive their money. The global financial crisis of 2007/2008 is considered by many economists to be the worst since the great depression of the 1930s. Many pensioners and indeed those still in the accumulation phase still bear the scars of the period known as the credit crunch. It was a period during which many reconsidered and in many instances pushed out their retirement as a result of the huge monetary value they saw wiped off their pension pots.
Data from the Alexander Forbes Pensions index suggests that the dream of retiring early is slipping further out of reach for the majority of South Africans and being replaced with the very real prospect of having to extend their career beyond the traditional retirement age of 65. This has been driven largely by two factors: insufficient savings to provide for a comfortable retirement and increased longevity, which means that those retirement savings have to last an individual for longer than has historically been the case.
This trend has moved the discussion away from strategies which enable a person to retire early to ways in which their retirement can be delayed. With this dramatic shift we have seen the introduction of a concept known as ‘phased retirement’ as a way in which individuals can gradually ease their way into retirement while continuing to make contributions to their retirement fund.
Leading multi-national financial services provider Aegon highlighted this global phenomenon in their ‘Retirement readiness survey’, indicating that nearly half of the existing employees surveyed expressed a desire to transition gradually into retirement by changing their work patterns. This should be desirable for employers and employees alike. For the former it allows them to retain skilled workers for longer and implement succession plans more effectively. For the latter it enables them to maintain a higher income than would be the case if they stopped working entirely, while allowing for a gradual reduction of workload so that the move into retirement is less of a culture shock.
By prolonging your working life you can achieve a number of desirable outcomes. Firstly, you can mitigate longevity risk by extending your working life you are proportionately reducing the amount of time that your savings need to last. Secondly, you will experience a huge increase in the value of your retirement savings by continuing to contribute and not eating into your existing savings by drawing an income from it. Most importantly, increasing the period of compounding on existing assets, where the most dramatic effect is seen on the contributions made during the early part of your career.
Despite the obvious benefits outlined above, employers often require their employees to retire between the ages of 60 and 65. Many South Africans are therefore forced into retirement before they intend to, or in many instances, can afford to do so. In turn, they seek further employment and may embark on a second career at this time. However, following this forced retirement from the fund, tax laws dictate that you purchase an annuity, where you have to draw an income even though you may not need it.
A pension is a tax efficient wrapper that provides important benefits that are lost when funds are withdrawn. For a member who wants to continue contributing after retirement it is attractive for them to be able to maintain these savings in a pre-retirement vehicle rather than being forced to annuitise. This outcome would ensure that they only pay tax on the income generated by their extended career and avoid paying tax on an annuity income that they do not need and which could push them into a higher tax bracket.
For members invested in traditional retirement vehicles the concept of ‘phased retirement’ remains a pipe dream for now, as it requires the support of both employers and government before it can become a realistic prospect. However, new generation retirement products such as Group Retirement Annuities can provide a way of circumventing this. When an employee leaves the scheme for any reason (including retirement) their association with the employer simply falls away leaving the employee free to retire from the RA at a time of their choosing after the age of 55. Should they find alternative employment, they can continue to fund contributions to the RA from their new source of income for as long as they are happy or capable, before choosing the timing of their ultimate retirement.
While the causes and severity of the next financial crisis are unknown at this stage, what we do know is that the current bull market will end at some point and that it will be followed by a bear market. We believe that members will be less fazed by this downturn when it takes place if they are comforted by the knowledge that their retirement vehicle provides the opportunity to contribute beyond the age of 60. The Group RA provides the opportunity to do so today without any changes in legislation required and in our view creates greater potential for optimal outcomes for both employers and employees alike.