How to keep your employees encouraged to save
For SME business owners particularly, Covid-19’s economic impact has hit hard. Though large companies are struggling too, smaller businesses often have less capital or income to cover their overheads. The tough economic conditions may well linger on, and where one member of a household has been left unemployed, they may have to cope on a reduce income for some time yet. Many employees may be asking if they can opt out of contributing to their employers’ pension fund, or company Group RA (retirement annuity), in favour of more money in their pockets.
This is understandable given how tight the purse strings may be lately, but if employers can keep contributions in place, encouraging employees to do the same will make the most of any current market opportunities, and ensure existing benefits remain intact.
Look back at the original why
While it may not be required by law to enrol employees in a retirement fund, many employers do; not only for the tax incentives provided by SARS but also because it is the best move for their employees’ financial future.
Employers usually state in employee contracts whether contributions to a retirement fund (including RAs) are compulsory or not. If the contracts do not state such a clause, employers have the option to suspend contributions or not, as the employer is making the deductions/contributions on behalf of employees.
Some employers may be seeking to stop retirement contribution payments, but should first check the rules of the RA fund, as underwritten by the specific insurer, as well as any collective agreements entered as section 13A of the Pension Funds Act provides that an employer must pay to a fund any contribution for which it is liable in terms of the rules of the fund. It must also pay the contribution which, in terms of the rules, is to be deducted from the member's remuneration/salary. Most insurers or investment platforms offering group RAs do not have the same rules as some retirement funds.
RA contributions are voluntary but take compulsory commitment for the best result
While the rules of most funds allow a participating employer to terminate its participation in the fund, and thus the payment of contributions to it, it is important to first get clarification from the fund administrators. Employees also need to understand that they currently enjoy a tax deduction because they contribute to their retirement and if they opt to receive these contributions as a salary increase instead, this increase may result in them falling into a higher tax bracket, which would mean that they would effectively be paying more to tax. This has the opposite effect of saving money per month, plus no saving for the future is taking place either.
The long-term benefits of regularly contributing as much as possible to retirement funds cannot be emphasized enough. Not only do employees detract from the compounded return they could get if they cease contributions, but they also forego the opportunity to put themselves in the best possible position to have enough disposable income post-retirement, and be financially free.
Get some professional insight
It would be prudent to have a financial adviser address the calculations and impact of ceasing contributions, versus staying invested. The numbers will speak for themselves and make the case for continuing with contributions, as difficult as it can be.
Remember it is much more difficult to catch-up later, so small sacrifices in income now will make up any disappointment later, when retirement saving has grown.