The importance of understanding your retirement savings.
We have reached the halfway point of 2021, and the year has been eventful: South Africans from all walks of life have been working tirelessly to re-establish a sense of normalcy following the challenges of the previous year, particularly the COVID-19 pandemic.
Amid this period's insecurity – an aspect of our shared experience – it continues to be a challenge to plan, and it is not always easy to imagine what the future holds for us as individuals, as a country, and as a global community. However, it is important to remember that we still have agency in many aspects of our personal and professional lives, and it is important for employees to understand the risk and retirement benefits available to them.
Members need to familiarise themselves with their level of accumulated retirement savings at various points in time and reflect on whether they are on track to meet their retirement objectives.
Below, I've included some considerations for members of retirement funds who want to improve their ability to achieve a more comfortable retirement. Members can improve their retirement outcomes by increasing the amount of money allocated to retirement savings.
As a starting point, they can simply increase the amount they contribute to their retirement savings. Another – frequently overlooked – method is to reduce associated costs, while another is to consolidate savings across various retirement funds.
I hope that these provide insight into the different levers that can be considered to help improve your retirement savings and improve your ability to retire comfortably.
Liberty continues to aim to support you through 2021 and we remain focused on our core purpose of being “In it with you,” while you strive towards a comfortable retirement.
The impact of retirement fund costs on a member's retirement outcome
It is essential for members of retirement funds to understand the impact of fees on their retirement outcome and what could be done to influence this.
Costs incurred by retirement funds can have a significant effect on the final value of a members' accumulated retirement savings. As most employers fix the total contribution rates that they make to a retirement fund on behalf of their employees, lower fees will result in higher net contributions to retirement savings. In other words, more money will be allocated to retirement savings and therefore a better final outcome.
For example, for every 1% more that is contributed towards retirement savings, the ultimate benefit at retirement increases by approximately 10%. This assumes that a member has worked for 40 years and that their investment has earned a real return of 3% per annum. Regularly reviewing the costs and options in one's retirement fund could have a substantial impact on a member's ability to retire comfortably.
Costs associated with retirement savings
To reduce costs associated with retirement savings, it is necessary to understand the levers to consider, by understanding the fees that may be charged. However, it is also important to keep in mind that the net investment return (investment return less fees) is key in what determines the accumulated value of retirement savings, so one should not just base one's choice solely on cost.
This section outlines the categories of charges that may be applicable.
Investment management charge
The investment management charge is the total amount charged for managing the retirement savings investments and is dependent on the investment portfolio choice and level of assets. It includes investment management fees, any performance or guarantee fees, investment administration fees as well as asset handling fees which are charged when making use of investment portfolios managed by asset managers outside of the Liberty Group.
Note: For Liber8 clients, investment administration fees are not charged separately. For Corporate Selection clients, these are charged for separately.
The advice charge is the amount paid towards the provision of advice and intermediary services. It includes commission for the provision of advice by brokers or financial advisers, which is based on the total premium paid by the employer and is typically negotiable, as well as investment consulting fees not included within the investment management charge.
These charges cover the expenses of administering the retirement benefit and are in the form of a monthly administration fee, which may include a distribution cost, where applicable.
These charges relate to the costs incurred from governing the retirement savings account (Governance levies) as well as levies imposed by the Financial Sector Conduct Authority (FSCA). It could also include other charges, where applicable, such as premiums or charges for guarantees.
An Effective Annual Cost (EAC) report provides a view of the current costs associated with existing retirement savings for members. To request an EAC report, members or fund financial advisers (on the member's behalf) can contact the Liberty Corporate call centre on 011 558 2999 or email@example.com
Cost of risk benefits
In addition to the above, risk benefit charges for risk benefits such as life cover, disability cover and funeral cover, are also applicable within umbrella fund solutions. These costs depend on the risk benefits provided or taken up within the umbrella fund options selected by employers on behalf of their employees.