Take your retirement savings with you, wherever you go
One of the biggest reasons South Africans struggle to save for retirement is that they withdraw their retirement savings on leaving or changing jobs. They then have to start saving again from nothing – but they also lose out on the compounding benefits those savings would have earned in the future.
To illustrate: using simplified assumptions, if you start saving R5 000 per month at the age of 25, you will accumulate R1.94 million by the time you are 65. But if you only start saving at the age of 40, you will need to save R47 000 per month to reach the same R1.94 million by retirement. Those are scary numbers.
Members do not always realise the devastating financial impact these decisions can have, however, nor that there is a major tax implication to withdrawing savings from a retirement fund. As many members are unlikely to seek professional advice, they may see withdrawing their savings as the simplest choice (and most rewarding in the short term). Those savings are then often used to repay short-term debt.
The new Regulation 38 for retirement funds, which came into effect on 1 March, will go a long way to changing this. Under the new regulation, any member enrolled in a retirement fund as a condition of employment will automatically remain as a paid-up member of that fund upon leaving employment.
Regulation 38: What it says
In the past, retirement funds made no provision for members to stay in a fund on changing jobs. Anyone leaving an employer had to take their savings out, either as cash or transferred to a preservation fund, a retirement annuity or their new employer’s retirement fund. Now, however, their capital will remain in the fund – even though they may no longer be making contributions – unless they specifically request otherwise in writing.
Employers will no longer present a departing employee with a choice of what to do with their retirement savings. Instead, they will simply inform the retirement fund that the member’s period of employment has ended. It is then the fund’s responsibility to issue that member with a paid-up certificate within two months.
The member may still withdraw their money or transfer it to another fund, but they must be given access to free retirement benefits counselling beforehand too help them make an informed choice.
The investment fees for paid-up members must not differ from those paid by active members, administration charges should be fair and reasonable and, in the normal course, lower than for active members. Furthermore, retirement funds cannot charge a fee to make a member paid-up.
Why it’s important
Preserving retirement savings has an enormous impact on anyone’s ability to retire comfortably. Making it easier to preserve savings where they can continue to grow will lead to better outcomes for many members.
It's also worth noting that when anyone joins a new employer and signs up to the employer’s retirement fund, the fund must request a list of paid-up certificates for that individual within four months. The member must also be given the option of bringing across any paid-up benefits they have in other funds to consolidate them in one place, free of charge.
Under the new regulations, members are able to move their retirement savings from one employer to another, easily and transparently, simplifying things for them and ideally leading to more retirement savings being retained for the purpose they were originally intended.