Statistics indicate that only about 6% of South Africans are able to meet their retirement income objectives and retire comfortably. Compounding this issue is that 97% of South Africans elect to withdraw their retirement fund savings in cash when they resign or are retrenched.
A big reason for poor decision making when it comes to retirement funds is that members don’t have access to financial advice, where the implications of each option and decision will have on their future retirement income, are fully explained.
The Pensions Fund Act (PFA) has been amended to include Retirement Benefit Counselling (RBC) which is a compulsory requirement for every retirement fund to fulfil effective 1 March 2019. The PFA requires that RBC be made available to members when joining a fund, at resignation and at least three months before retirement. This means at any of these stages the members have to be provided with information on their options, fees and costs in simple and clear language. Members can use that information for better decision making. Many members have made the poor decision of withdrawing their funds because they didn’t appreciate the impact on their retirement income, or understand the negative tax implication.
RBC also includes an explanation of investment portfolios, the fund’s annuity strategy, rules about preserving withdrawal benefits and other fund options. This not only ensures access to information for members but also assists members to understand the impact of their decision on their retirement outcomes.
RBC will potentially usher an increase in preservation of funds which would lead to improved prospects of a comfortable retirement.
Members should use RBC to their advantage especially if they cannot afford financial advice. However it is still important to obtain financial advice even after RBC has been offered to the member. RBC is there to provide factual information and not advice.
Once the member is fully informed of their options and implications of those, a financial advisor is needed to assist in providing tailor-made advice, specific to the needs and circumstances of the individual. With RBC members will be better empowered to use the information provided to their advantage.
Different funds and administrators will roll out RBC differently, with the minimum requirement being to provide the members with written information. We may see some funds offering face-to-face engagements. This option has the potential to yield better outcomes because it provides an opportunity for better understanding and a chance to ask questions where further clarity is required.
With the introduction of RBC the trustees of retirement funds have an increased responsibility to their members. The intention of RBC is to promote better retirement outcomes for members. Whether or not RBC will help funds achieve this will be seen in time.
Happy Ngale is the Manager of Financial Wellbeing at Alexander Forbes.