Richer retirement – annual tax benefits for up to R350 000pa that you save
Saving for retirement is a hot issue in South Africa right now. New legislation to be introduced next year will make it much simpler for us to save for retirement – with a deduction for tax of a straight 27.5% of income saved up to a maximum of R350 000. Jean Lombard of Glacier by Sanlam explains to Alec Hogg how it will work and addresses a range of other issues from costs and distribution. A must-listen for financial advisors; and insightful for everyone interested in building their wealth. – AH
ALEC HOGG: This special podcast is brought to you by Sanlam Investments. This morning, we're talking to Jean Lombard who's the Head of Business Integration at Sanlam Investments. Why do we need to change the way that retirement planning is handled at the moment?
JEAN LOMBARD: Alec, I think many people in South Africa don't reach retirement with enough money, in order to maintain their standard of living post-retirement. South Africans are generally bad at savings toward retirement. A big reason for that is a large proportion of South Africans tend to cash in either some or all of their retirement savings when they change employers. What Government and the industry is trying to do is… The Government really wants to try to put incentives in place to get people to save more and to provide adequately for their retirement. Government's sole objective at the present point in time with retirement reform is to ensure that all employees contribute towards retirement in some or other vehicle, that their savings are preserved when they change jobs, that they have access to reasonably priced investment products, and that they can sustain the income for life once they do actually reach retirement.
Tax-efficient savings vehicles will be quite important, going forward, for Government and for the industry.
ALEC HOGG: It's an ambitious plan if you just start off with the preservations of pensions. This week on Biznews, we ran a piece by Allan Greenblo who was saying that there seems to be quite a lot of conflict within the authorities, on that topic alone. Do you think that they're going to have the political will to push it through despite the fact that the unions are perhaps camped against it?
JEAN LOMBARD: Alec, I honestly don't know. I'm not close enough to the discussion between unions and Government in terms of the preservation. However, from our discussions with Government, I think preservation is really important for them so they will try their utmost to push as much preservation through, as they can. What we also need to realise in South Africa is that you can't tell a person to preserve the capital that you've come up with and save towards your retirement when you don't have a job for the next five or ten years. We do sit with high unemployment and I think that does need to be factored into government thinking when they look at preservation. The answer is 'I'm not sure'.
ALEC HOGG: I suppose the concern there is that when people in this environment lose their jobs, they tend to dip into their retirement savings for a period of time. We understand that many people did that during the platinum strike, for instance.
JEAN LOMBARD: Yes, absolutely. You're 100 percent correct.
ALEC HOGG: So it's in the culture and it's something that needs to be changed on that side. Let's say it all goes according to plan: what kind of tax issues are we likely to see, given that at the moment, retirement annuities do offer some pretty good tax incentives?
JEAN LOMBARD: Alec, I think you've touched on one of them. Investors save predominantly in three vehicles towards their retirement: retirement annuity, pension fund, or a provident fund that they save in via their employers. The current challenge is that those three vehicles each carry their own different rule structures. For example, on the provident fund you can take the full lump sum as a cash pay-out, at your retirement. Obviously, there are tax implications, but you're allowed to take the full lump sum. With pension and retirement annuities, you are obliged to buy an income-type product that will provide you with an income, with at least two-thirds of your lump sum at retirement. The rules aren't the same. The tax incentives for contributions to those vehicles aren't exactly the same, and what Government is trying to do is to align the rules around those types of products.
In addition, the tax incentives are different so again, Government is saying 'let's rather make it simple. Employees can deduct 27.5 percent of their remuneration or taxable income in a year, towards their retirement', but they will cap it. They will cap the tax incentives per annum. Of course, it does mean that people saving more than R350, 000.00 per year have some opportunity between now and the end of March, to make some large contributions to their retirement annuities or their pension funds, and still get their tax incentive.
ALEC HOGG: And does this all kick in very soon, or is it already in play?
JEAN LOMBARD: It's effective 1st of March 2015.
ALEC HOGG: So that's the reform that most people have been targeting. How's it going to affect investors? Take me as an example. I like to put a little bit of money into unit trusts and maybe a little bit into equities. How am I going to change my habits, given this reform that's coming through?
JEAN LOMBARD: If the rules are simpler, it should be easier to invest. It's easier to invest in something if you understand how it works and what the tax incentives are, so it will make tax planning easier. It should make investment easier and it will align the rules, so that you don't get arbitrage opportunities. I just think that overall, a simpler, less complex system is better for everyone, Alec.
ALEC HOGG: But the cost issues have been front and centre, too. Are we likely to see some pressures there?
JEAN LOMBARD: I think there's been a lot of pressure on cost in the industry over the last number of years already. If you just look at the margins that the financial services companies have made over the last number of years in South Africa: I heard Dr van Zyl say yesterday in an interview around our results presentation that the margins Sanlam makes outside of South Africa, are probably more than double the margin they make inside South Africa. Increased competition in South Africa has definitely resulted in lower costs and 'fees squeeze' in the industry. How low can that go? I'm not sure. Will Government regulate costs in South Africa? I think it's too early to tell and we haven't seen some clear guidance from Government on that, but I do think investors can get a very good deal, presently. Looking at international research, we're not that far off from our international peers.
ALEC HOGG: Who's paying for these costs that are being taken out of the system? Somebody would have been earning them in the past and is no longer doing so.
JEAN LOMBARD: Yes. I think the margin squeeze has happened over the whole value chain, so I think the end client is the beneficiary. They're paying a lower total cost in the end, but there's been a total cost squeeze, whether it's on a platform basis… Financial intermediaries have negotiated fees down. Asset managers' fees have come down, so I think it's across the value chain that fees have come down in general.
ALEC HOGG: And you guys at Glacier by Sanlam: what have you been doing to adjust to this new reality?
JEAN LOMBARD: In addition to the fee squeeze that we've been going through Alec, one of the things we've realised – one of the big trends – is that people do tend to live longer. Where people used to plan for retirement savings to last 20/25 years post-retirement, they now need to plan for 40 years, potentially. If you only save for 40 years and your money needs to last for 40 years, that's a scary scenario to think about. Investors carry this risk, depending on the income product that they chose. If they chose a guarantee type of annuity then obviously, the life company provides the guaranteed income. However, if investors are invested in investment-linked life annuity where they make the choice in terms of their investment decisions, they take the full mortality risk (the risk of living longer than expected) and they carry 100 percent of the investment risk.
What we've done at Glacier is we've recently launched a product – the Investment-linked Lifetime Income product. It's essentially, a combination between the guaranteed annuity and the investment-linked living annuity, so the investor has a choice in terms of how he invests his assets, so he can still get access to that very important growth assets – the equities and the property. What's very important is that Sanlam now underwrites the mortality risk. Sanlam gives them this income for life. I think that's a fantastic initiative on our side and an innovative new product in South Africa – definitely a first.
ALEC HOGG: Talking about innovations, we hear a lot about this 'retail distribution review'. I'm a bit confused, not being as close to it as you are, but if anyone's going to help us understand what it's all about… It hasn't come in yet, but how might it change things?
JEAN LOMBARD: Alec, I think RDR (retail distribution review) has been with the U.K. for about ten years now already, so they've implemented this and it's been ongoing in the U.K. Retail distribution review is really aimed at ensuring that the financial services industry is seen and experienced as a professional industry by the clients they serve. I think there are three key highlights of RDR. (1) It focuses on costs and cost disclosure, so the client needs to understand what the cost of a product is, and I think that's really important. (2) Advisors will have to make sure that their clients understand exactly what products they can advise them on, so that they don't sell them something that they're not accredited to sell. (3) Lastly, but very importantly, it's also about making sure that the people selling the financial products (the financial intermediaries) maintain a minimum professional standard.
The whole regulatory exam thing that we went through over the industry over the last two years that Government has pushed through, has already cleaned up a lot of the industry and made sure that many financial intermediaries left today in the industry, have some nice qualifications, many MRCFP's, and it's a professional industry that we work in. I think the risk around Retail Distribution Review (if I may add) is that if we implement it exactly as we did in the U.K., the potential is that what will happen in South Africa is exactly what happened in the U.K. and that's really, an unadvised middle market. It just becomes more profitable for people to move up the income spectrum and only advise South Africans that have money, and that will be a sad day in South Africa.
ALEC HOGG: So there are a few challenges there as well, but at least the professionalism has improved, and is improving. Jean Lombard is with Sanlam and this special podcast was brought to you by Sanlam Investments.