Wednesday, January 19

Early Access to Retirement Savings in South Africa is a Risk – Here’s Why

The Covid-19 pandemic has put financial pressure on businesses, households, and individuals. It’s causing more seniors to retire early, according to recent data. investigate. This means that retirees could be claiming more social security benefits.

Pandemic pressures are one reason why South Africa National Treasure announced in August 2021 that it planned to review the withdrawal rules. With rising costs of living and income insecurity, many people simply cannot afford to wait until retirement to access their pensions. The review is expected to take effect in 2022.

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Currently, retirement fund members can only access their pre-retirement benefits after resignation or downsizing. Even then, a high level of retirement taxes is imposed to discourage members from accessing these funds prematurely. This system has been in effect since The Pension Funds Act of 1956.

Members who resign or are terminated are encouraged to preserve their pensions for retirement, such as previous investigation found that pensions are the only form of long-term savings for many South Africans in formal jobs.

The situation is most dire for the unemployed and those in informal employment, who are estimated to make up two-thirds of all South Africans.

The treasury decision can have positive short-term results in which people can use their pensions to meet immediate and urgent financial needs. But its long-term implications are cause for concern, or should be. My investigation suggests that most people are unlikely to understand these implications clearly and therefore run the risk of making poor long-term financial decisions. It is estimated that only 6% of South Africans are financially independent upon retirement.

Financial education

For many people in South Africa, family ownership and retirement savings are the bulk of their wealth. If you start tapping into your retirement savings and investments early, your wealth won’t have time to grow and your savings could be depleted earlier than planned.

It starts with savings. AND research consistently shows that people are more likely to save if they are financially savvy. They have to understand the benefits of long-term savings. Professional financial advice is essential to promote long-term savings and investments; however, less than 20% of South Africans have financial advisers.

The ability to save for retirement is complicated in South Africa by the fact that differences in employment, income and financial education are still racialized. The National Treasury proposal may widen these differences.

Weather past studies have explored the general financial literacy of South Africans, little is known about their retirement education.

I decided to fill part of this gap by conducting a study of 125 people who had not yet retired. The study was conducted in the Eastern Cape province of South Africa, where the majority of respondents indicated that they are black South Africans, with a bachelor’s degree as their highest level of education. The research sought to answer two questions: 1) To what extent do people perceive themselves as literate in retirement? 2) How does people’s perceived retirement literacy compare to their actual retirement literacy?

I found a clear discrepancy between how many people thought they knew and what they actually knew about retirement finances. With the financial pressures caused by the pandemic and talks about early access to retirement funds, the need to bridge this gap is clear.

Good intentions

My investigation It consists of two parts. In the first, I administered a questionnaire on what respondents thought about their own knowledge about retirement, retirement planning skills, intentions to actively plan for retirement, and activities undertaken to plan for retirement.

The questionnaire revealed that the majority of the people who participated in the research (65%) intended to plan for their retirement by making contributions to a pension fund and planned to seek professional financial advice for their retirement. The sample also agreed (43%) that they understood how retirement funds work. More than half of the respondents (53%) said they were comfortable with concepts related to retirement, that they could apply their knowledge to improve their financial well-being, and they were preparing for a financially secure retirement.

In the second part of the study, I investigated people’s actual retirement literacy through a multiple-choice test. The main test areas covered: general financial knowledge; Retirement related investments and advanced retirement skills. One question weighed your understanding of inflation and its impact on savings. Another tested his knowledge of asset allocation in retirement funds. Knowledge of tax implications on retirement benefits was also assessed.

Overall, 59% of the sample failed the retirement literacy test. While the majority of people (75%) were able to answer general questions related to finances correctly, less than half of those surveyed (47%) were able to answer questions related to finances related to retirement. When more advanced concepts related to retirement were presented to respondents, only 10% gave the correct answers.

In particular, respondents lacked knowledge of how stocks, in the long term, outperform other types of financial securities and the importance of preservation funds. This finding corroborates reports on how many South Africans do not keep the retirement provisions they receive from their pension when they change jobs or employers.

Perceived and real knowledge

Now that many people are under financial pressure and may soon be allowed to spend a portion of their savings for retirement, it is important that they understand the options and the risks.

While the services of a professional financial planner can help manage retirement and savings plans, the extent to which money management is taught at home should also be considered.

An act of saving is a Cultural value, one that is passed down from one generation to the next. Instilling this value from an early age can change the way finances are managed from adulthood to old age. This would have the benefit of reducing dependence on family and government grants at the time of retirement.

Overcoming the taboo on money in families and communities helps develop positive financial attitudes, demystifies financial management, and promotes financial well-being.The conversation

Mrs. Zeka, Assistant Professor of Finance and Financial Planning, Canberra University

This article is republished from The conversation under a Creative Commons license. Read the Original article.

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