By Money marketing on February 20, 2014  in Financial Planning

Given the emphasis Finance Minister Pravin Gordhan placed on the country’s low savings rate in the 2013 October medium term budget last year, the 2014 Budget is expected to bring clarity to how government intends to improve these levels, especially in the face of rising interest rates and inflation.

This is according to Craig Aitchison, Old Mutual Corporate GM of Customer Solutions, who expects the 2014 Budget Speech to address government’s commitment to accelerated retirement reform, as well as its progress on 2013 retirement proposals such as the auto-enrolment initiative. The Minister of Finance announced proposals in the 2013 Budget Speech to reform the retirement industry, with a focus on governance, preservation, annuitisation and harmonisation of retirement funds.

“There is a need to put measures in place to improve the country’s saving rate, which will improve local fixed investment and make South Africa less vulnerable to foreign investment, which we have seen can leave the country quickly during times of global volatility,” says Aitchison.

“Long-term, a higher savings rate will help stabilise the rand against major currencies. We expect to see an increase in proposals to improve contributions to retirement funds through tax changes, preservation of retirement savings, and tax–incentivised products in the 2014 Budget, which will enable a long-term savings culture in the country. We also expect the Minister to have firm dates for the introduction of the tax-incentivised products and the tax amendments of retirement funds.”

According to ASISA, 2013 withdrawals from the retirement schemes in the first half of the year (excluding retirement and payment of death claims) amounted to R15 billion. In addition, the Old Mutual Retirement Monitor 2013 found that 61% of members who changed jobs in the past 15 years withdrew some or all of their retirement fund benefits in cash (most taking the full amount in cash).

Aitchison believes that one of the ways to increase the savings culture in SA is to have better defined regulations around encouraging people not to cash in on their retirement savings when leaving their place of employment. “Preservation is a key element to enable a savings culture, and having a firm proposal in pace with regards to preservation of retirement funds will go a long way in ensuring South Africans are encouraged to save for this stage in their lives.”

The Old Mutual Retirement Monitor found that 85% of respondents felt that not having enough money to retire was their greatest retirement concern. Aitchison explains that the auto-enrolment proposals by Treasury can effectively address the concerns around our nation’s growing appetite for spending and lack of financial preparation for retirement.

“We also expect the progress on government’s auto-enrolment initiative, which will require nearly every worker to be signed-up to their company’s scheme, to be a focus in this year’s Budget. Currently only about 50% of employees invest in a retirement fund, yet saving through retirement funds remains an effective vehicle for retirement.”

Aitchison believes it is likely that incentives will be introduced to encourage retirement fund savings, as last year Treasury acknowledged employers’ increasing role and responsibility for the overall financial wellbeing of their workers. , This role extends to how they design their retirement funds. .

“While tax incentives can encourage high-income earners to auto-enrol, there is a need to also offer monetary incentives to very low-income earners. To cushion the impact of the cost of these incentives on SMEs, the government should consider introducing an administration subsidy for the first year.”

To entice low income-earners to save, Aitchison further suggests that government consider paying a small lump sum into these earners’ retirement savings, to be accessed only if the person saves for a set period. “There is a need to determine the size of such a kick-start lump sum and the cost it will have on government revenue. However, even with a modest contribution rate of 3%, auto-enrolment will result in additional savings of more than R20 billion per annum.”