Alexander Forbes recently released the first major research on the financial survival of pensioners of retirement schemes in SA – and it does not make happy reading. This research was done before the Covid-19 outbreak and Moody’s downgraded South Africa. The situation now is likely to be far worse.
Alexander Forbes has examined a number of issues including retirement dates, choice of annuity (pension) and how much capital retirees have at retirement.
The big question, however, is: Do South Africa pensioners have enough money to last from the date of retirement until death? The answer for most is: no.
An actuary and a leader in retirement research, John Anderson, head of strategic development at Alexander Forbes, says many retirees are going to have cut back on spending and rely on others, such as children and relatives to survive.
If they are young and fit enough to work they need to get out there. This is a good option to supplement income if you can.
The older you are and the more ill you are, the less likely you are to find a job.
The survey is based on research on 11,594 pensioners, who retired between 1992 and 2018.
They retired with capital of R26-billion, an average of R2.2-million each.
But when you break down the “average” by age groups, the figures look very different.
The next thing to look at is what are the replacement ratios. This means the percentage of your final paycheque without any add-ons such as car allowance or any other allowances.
Most retirement funds work on providing 75% of income after 40 years of service.
In other words, at least 85% of people did not save properly for retirement.
Anderson says the main reason for this is that people either started too late, or they cashed in their retirement funds when they changed jobs along the way.
While people may have additional savings outside of their formal retirement funds, this is not included in the study. That, however, is not likely to materially change the overall picture.
Other Alexander Forbes research shows that of more than one million contributing retirement fund members, of those who resigned, or were retrenched or fired in 2019, only 8.75% preserved their retirement savings. This is down from 11.5% in 2012. Most of this lack of preservation takes place when members are under the age of 50.
Anderson says during the current tough times in South Africa the number of people preserving retirement savings may shrink even further.
Once people reach retirement, they have to make a choice about retirement annuities. This is the money most will spend for the rest of their lives, and it is a critical choice.
The two main types of annuities (pensions) are: a traditional life assurance annuity where the pension is guaranteed and once you have made your choice you cannot change it; or what is called an investment-linked living annuity (Illa) where you make the investment choice and the underlying investments (with or without the aid of a financial planner). About 90% of pensioners chose Illas.
The basics of a traditional life assurance annuity are: