Watch this pension fund trend if you want to retire comfortably one day: two-pot system, increasing digitization and new annuity options.
The decisions you make today based on these trends will affect your life for years to come.
According to the South African Treasury, only 6 out of every 100 South Africans can retire comfortably. What will happen to the other 94?
The two biggest reasons pension fund members don’t have enough money for retirement are because they don’t save enough and fail to maintain retirement assets when they move to work, spending their pension payments instead of adding them to their pension fund at a new employer.
“If you think you can easily catch up on your retirement savings by making additional contributions later, you will be in for a rude awakening. Depending on when you start contributing again, the required rate can be anything, from 17% to 50% of your salary,” he said. Craigh Chidrawi, retired chief executive of pensions at NMG Benefits.
He said one of the positive effects of Covid-19 is making South Africans more aware of the need to achieve good financial health and a comfortable retirement and to do this, it is important to understand the main trends in the pension fund industry today and how they affect you.
two-pot system
The government’s proposed new ‘two-pot’ pension system, now set for 2024, tries to balance the need for financial life now as well as after retirement.
“Basically, the system will see you put one-third of your pension contributions after the effective date into a savings pot that allows early access and two-thirds into a pot that is used to buy an annuity after retirement.
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“The benefit will prevent people from having to pay expensive short-term loans, when they are forced to keep two-thirds of their funds in the long term and not pay when they change employers. The downside is that the withdrawal is taxed and destroys your capital,” he said.
Increase digitization
The pension fund sector is rapidly digitizing, like all other sectors. This means pension fund members can more easily monitor fund performance and will be able to have greater insight when discussing options with their pension adviser.
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Using digital tools to understand the retirement income you will receive is an important part of proper retirement planning, Chidrawi said.
Other annuity options
They indicate that the days of being locked into your chosen retirement income are over.
“There are various forms of guaranteed retirement annuities that provide income for life (and the life of your spouse, if you choose this option), or pay a lump sum benefit on death.”
Chidrawi said consumers should seek advice on what is right for them as they can choose from options that can secure fixed living expenses through a guaranteed annuity to ensure that these expenses are covered for life, while buying a life annuity with residual capital to leave some kind of legacy finances for the family.
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