Many South Africans who retire at age 60 or 65 find themselves returning to work in an effort to supplement a meagre retirement pot, while others do so because they simply enjoy working.
But often regulation can be unsupportive of such a move.
Currently, individuals are allowed to withdraw one third of their pension in cash at retirement. The remaining funds have to be used to buy an annuity, which could be a guaranteed or living annuity.
Kobus Hanekom, head of strategy, governance and compliance at Simeka Consultants & Actuaries, a benefit consultancy within the Sanlam Group, explains that if a guaranteed-type annuity is bought, the monthly pension payments will become payable immediately upon retirement.
If a living annuity is purchased, the retiree will have to take an
annuity of at least 2.5% (up to 17.5%). In terms of current regulation, this payment may not be deferred to a later stage (for example, at age 70), regardless of whether the retiree needs the money or not.
Hanekom says that, in a sense, the living annuity does allow some deferral, since the remaining lump sum remains invested. However, the 2.5% drawdown remains compulsory and no funds may be added to the pot.
The problem is that the regulatory environment has not kept pace with the changing world of work, in which people often retire, start working again, and then retire again later, he says.
National Treasury has already embarked on a significant retirement reform process, which is likely to see the introduction of some form of compulsory preservation vehicle soon. There is also a big drive to reduce charges in the industry. Early indications suggest that Treasury may be looking at regulatory amendments that could allow for deferred drawdowns.
Hanekom explains that large corporates often set the retirement age at 60, due to corporate employment strategies. How-
ever, they would allow highly skilled employees to stay on as contractors.
This practice is acceptable, but for employees, the termination of service (retirement) effectively means they are forced to move their money into an annuity and to start withdrawing funds.
Hanekom says that a decision not to retire, and to withdraw the retirement funds, could lead to the employee forfeiting other benefits, such as share option schemes. Retirement is linked to other corporate benefits, which will be far too big for you to simply forgo in the interest of withdrawing your amount when retiring.
One area in which legislative amendments could provide relief is to allow contractors or consultants to be included in the fund as members, even though they are not officially employees anymore.
Another alternative is to allow employees to move their retirement funds to a preservation fund. Currently, the law does not allow contributions to a preservation fund, which means that the retiree has to take out an additional retirement annuity, resulting in further fees. Amending regulations to allow contributions to preservation funds is thus an alternative.
Hanekom says that another option is to allow the purchase of a living annuity at retirement, but to change the rules to permit further contributions and to allow retirees to only start drawdowns at age 70 or later.
The Citizen / Uncategorized
12 March 2014