Retirees facing 70% downgrade

LIFESTYLE SHIFT: MOST GET 28.8% OF THEIR SALARY

Average replacement ratios of those who retired in the year to March is R2 880 for every R10 000 earned pre-retirement.

If the average active fund member continued contributing to their retirement fund at their current rate until they retired, they’d only earn an income equal to about 40% of their salary in retirement.

This is a finding in Alexander Forbes’ Retirement Fund Member Watch Survey, covering just over a million members in 2 030 employer clients.

The average replacement ratio – percentage of final salary just before retirement received as a retirement income – of the 7 200 members who retired during the year to March 31, was 28.8%.

“For every R10 000 that somebody was earning pre-retirement, their pension is R2 880,” says Alexander Forbes’ Michael Prinsloo.

This amounts to, roughly, a 70% reduction in a person’s income, and thus lifestyle, in retirement.

Some retirees may have other retirement assets from which to draw an income, and the reduction may be overstated, but because only 8.7% of members preserve their benefits when changing jobs, it’s assumed the pension will be the only source of income for many. They will have to supplement their income another way. The survey found only about 6% of the total membership can expect a replacement ratio of over 75% of their pensionable salary in retirement.

Preservation

Prinsloo says more people are leaving jobs each year and that provides an opportunity for people to cash out their benefits.

A machine-learning analysis with data from the last three years identified five factors influencing preservation levels: the fund credit size, industry sector, reason for leaving the fund, access to financial advice, and whether the fund offers a preservation solution.

The fund credit size plays a significant role: 61% of those who didn’t preserve any benefits had R25 000 or less (<R25 000 no tax is payable on withdrawal), and 37% had a benefit of R25 000 to R660 000 (18% tax payable). Although government increased the tax deduction for retirement contributions to 27.5% of taxable income/remuneration in 2016, the average total contribution as a percentage of pensionable salary has reduced slightly to 14.11% in 2018 (2015: 14.2%). While salaries have generally grown faster than inflation, investment returns haven’t kept pace. “[Investment returns] actually need to beat your salary inflation, because that is where you are generating wealth in order to maintain your lifestyle post retirement,” Prinsloo says.

Investment returns haven’t kept pace with inflation

Silver lining

Positively, the survey shows a reduction in the number of members making their own investment choices; but, this means there’s much responsibility on trustees to recommend appropriate defaults.

Also, the most common retirement age increased from 60 to 65 in 2013.

This enables people to save for five more years, while also reducing the time they live off retirement funds.