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How retirement reforms will encourage retirement savings

National Treasury has introduced a number of policies aimed at encouraging South Africans to increase their retirement savings. In the 2013 budget, former minister of finance – Pravin Gordhan – announced a number of retirement reforms, i.e. taxation of retirement funds, compulsory preservation and on-retirement savings. Particularly significant in these reforms in the question of 'preservation', which was introduced to make sure that a person's assets are retained – in their own name – for their use during retirement. Batseta, leading industry body actively contributing towards the advancement of the retirement fund industry, breaks this concept of 'preservation' down further.

In South Africa, preservation has been very poor, says Nicolette Nicholson - head of legislation at CRS Technologies . "This is worsened by the 25.2% unemployment rate and an informal sector that does not fall in the ambit of any savings pool."

In addition, there is a very strong tendency for people when, for example, they're move jobs and are paid out the monies that the company has invested on their behalf, not to reinvest this pay-out in a similar scheme and rather to use this capital for other expenses that they aren't able to meet.

"It has been estimated that roughly 70% of people who leave a company for another job, and about 90% of those who have been retrenched, will withdraw their retirement savings," said Batseta in a statement.

The tragic result of this is that many people reach retirement age without having enough money to survive and consequently, they end up having to work well into the 70s because they simply can't afford to retire.

The concept of preservation aims to correct this challenge by making it compulsory for individuals to preserve their retirement funds when they move jobs. When one moves from one job to another, the temptation to withdraw these funds isn't great as there is a guarantee of continuing income. However, when one is retrenched, as a continuing income stream isn't guaranteed, it's tempting to withdraw one's retirement funds as a stop gap until another job is acquired. This means that it will be necessary, when the laws on preservation have come into force, to look differently at people who've been retrenched versus those who have merely changed jobs.

Batseta states that when the preservation laws come into force, they will not apply retrospectively. What this means is that you will only be required to preserve retirement savings that you have accumulated from the date the law comes into force onwards. The preservation laws won't apply to any retirement savings you've accumulated before this date – although this shouldn't be taken as encouragement to squander retirement savings that were acquired pre- the preservation laws!

Preservation will also allow limited access to funds. "This is very significant," says Batseta in a statement, "as we have heard about some unscrupulous brokers and service providers who are convincing members that they need to resign from their retirement funds to access their savings. This has resulted in terrible financial consequences for the members and should never be done. If in any doubt, members are urged to get more information from their retirement fund office bearers."