Managing your RA when switching jobs

FIFI PETERS: In today’s personal finance feature we are looking at a retirement annuity and how you can better manage it when you are switching jobs. Most people really can’t afford to retire right now, as has been the case for a very long time. One of the reasons is because most people tend to cash out their pensions or their provident funds when moving jobs, therefore not leaving enough in the bank for retirement.

But to talk to us about how a retirement annuity can assist with this problem and how it can better be managed, I’m joined by Samukelo Zwane, the head of Product Development at FNB Wealth and Investments. Samukelo, thanks so much for your time. I thought that South Africans were saving a lot more because of the pandemic, and not really spending as much. Just talk to us about the trend that you are seeing presently in terms of people cashing in their provident or pension funds. Is still very frequent or has it come down?

SAMUKELO ZWANE: Good afternoon, Fifi, and good evening to the listeners. You’re absolutely right. The trend when it comes to people saving is a worrying factor. Most people, when they get in retirement, have not saved sufficiently for retirement. There are a number of reasons for this.

In some cases, when people are changing jobs, one of the big reasons is they cash out on their pensions and use that to pay debt or to do something else. However, that sets them back in that, in most cases, when they’re withdrawing their pension they’re probably five or 10 years into their working life and they’re left with another 20 years. So they don’t have enough time to recover and make enough savings for them to have a comfortable retirement, and they forgo the power of compounding, which comes with time.

The more you save over a long period of time, you benefit from compounding returns – and [if you cash in] you forgo that part because the time that you have [left] for saving is shorter. So it’s a worrying trend that we’re seeing people basically catching in on their retirement when they’re changing jobs, which is something that we would love people to be aware of, and try to curb that type of behaviour.

FIFI PETERS: Okay. So it’s still bad, essentially, is what you’re saying. I think now the question is – I suppose it depends where you are in your career life – but if you are around 30/35 and you’re not trying to end up like most retirees out there, you want to find out a little bit more about how you can [avoid that] – you’re saying a retirement annuity can help with the situation in some way, in terms of managing your savings when switching jobs. So how can a retirement annuity do that?

SAMUKELO ZWANE: Thank you, Fifi. Yes, absolutely. A retirement annuity is a legislative retirement-saving vehicle. Why do we say it’s legislative? [It’s] these benefits that you get from the state, from just using a retirement annuity to save you for your retirement.

The first benefit is that any contribution of up to 27.5% [of your salary] that you make into a retirement annuity, the tax on those contributions is refunded back to you. So that’s a benefit that you get. So if you’re saving over a long period of time, such as 25 to 30 years, that could give you an additional return of up to 18% – just the fact that you’re not paying tax on your contributions. That’s something very interesting for people to note.

Then the other thing is that on any contributions or the investments that you have made into a retirement annuity, you are not taxed on it. So you do not get taxed on the amounts that you are accumulating. You don’t pay tax on dividends. You don’t pay tax on interest. You don’t pay tax on capital gains, as long as you’re doing a relocation within your fund. So that’s the additional benefit that you get from being in the retirement annuity.

It’s also protected against creditors. So your creditors, in the event that you become insolvent, cannot claim against it.

There’s another benefit, which is separate, in that you can’t access this money until you get to age 55. It’s a way of making sure that you remain disciplined and are in a position whereby you save sufficiently by the time you get to retirement. So it’s quite important that people take advantage of such legislative vehicles when they’re saving for retirement.

FIFI PETERS: It’s a good thing, I suppose, in terms of managing the discipline – the fact that with the retirement annuity you can’t access the money today, unlike the case with a pension and a provident fund. But then also the reason why some people are changing jobs – in fact, sometimes the reason why some people even resign – is to get that money because it’s raining now, it’s tough now.

So for those people who are using that money – not to go on holiday to Mauritius or to buy a new flashy car – is to address serious needs within their lives, within their homes. Just give us your thoughts and the thinking around that, on how you can address the immediate need without compromising the need for the future of retirement.

SAMUKELO ZWANE: Absolutely, Fifi. It’s quite a brilliant question in that people are faced with challenges now, not 20 years down the line. What to advise people is [for them] to explore other options if they are available. There’s the option of downsizing your car. If you have a car that’s big, you can downsize and get a bit of savings on that, or downsize your house as well, or look at your budget and your expenditure to see where else you can cut, so that at least you do not have to dip into your retirement savings now. So we encourage them to explore all other options before they start tapping into their retirement savings.

FIFI PETERS: How easy is it to open one? I think that we’re living in a time whereby the employment landscape is changing. You’ve got a lot more independent workers now, and I find that a lot of those people don’t have any form of retirement savings tool that they’re contributing to. It’s not like permanent employment, where it usually comes with the job – that’s a pension or a provident fund.

So, to independent contractors out there right now wanting to know more about an RA, how they open it, even if you’re leaving a job to become an independent contractor and you’re going to get this money paid out to you from your pension or your provident fund, you want to know how you shift it to an RA. Just give us the answers there.

SAMUKELO ZWANE: Absolutely. The first thing that I’d love to mention is that your retirement annuity is not tied to your employer. So if you are working and now you want to change jobs, you can still continue contributing into your retirement annuity because it’s not tied to your employer, unlike a pension fund or provident fund, which is tied to your employer, and when you leave your employer you have to either transfer the money into a preservation fund or a retirement annuity. So with the retirement annuity, as you move in your career, you can continue saving in your retirement annuity. At FirstRand and FNB, we’ve made it easier for people to open a retirement annuity. You can do it within three minutes, using the FNB app. You can select your retirement annuity, select your underlying investments, select your beneficiaries in less than three minutes – and you would have an investment in a retirement annuity. So that’s how easy it is now to access a retirement annuity and secure your future using savings right now.

FIFI PETERS: And how much should you contribute on a monthly basis? How much of your salary should go towards retirement?

SAMUKELO ZWANE: We make it easy for people. From an FSB perspective, you can start from as little as R300 in terms of saving on a monthly basis. But we do encourage people to save more and take advantage of this tax situation that is presented by the state.

So, if you can afford to contribute as much as 27.5% of your savings or your salary, that would benefit you because you are getting the tax back on that money. So we start from as little as R300 per month, but you can save as much as you can afford, and we recommend that you take advantage of the tax concessions that are being given to you.

FIFI PETERS: But in terms of proportion, or perhaps put differently, in terms of the proportion of your salary? For instance, if you earn a thousand a month, what percentage ideally should be going towards retirement if you want to have a better life when you no longer work?

SAMUKELO ZWANE: Ideally you should save at least about a third of your money in trying to save for retirement. Then the other two-thirds is used to secure your liquidity needs – for which you might have emergencies right now – as well as to secure your risk cover and your risk benefit.

FIFI PETERS: Got you. Samukelo, thanks so much for your time, sir. We’ll leave it there. Samukelo Zwane is the head of product development at FNB Wealth and Investments.