Due to under-saving, most working South Africans are unable to keep up with their basic needs if and when they retire. This so-called “retirement gap” can be calculated at any point in an individual’s lifetime to determine whether they are on track to achieve a good retirement outcome or if changes are needed to make up for an indicated shortfall.
Underlying issues: Cost of living, unemployment and lack of preservation
Economic downturn, steep unemployment rates and the high cost of living post the COVID-19 pandemic have further widened the overall retirement gap in South Africa. Meanwhile, many desperate workers have either done away with, or lowered, their retirement savings contributions and accessed their existing retirement savings to fund day-to-day needs.
The government and financial services industry have long observed the struggle for retirement fund members to balance preserving their long-term retirement savings with the need for access to funds during emergencies and financial difficulties. The two-pot retirement system implemented in September 2024, aims to combat financial hardship by allowing limited access to retirement funds, while enforcing preservation.
As an employer, you can play a role in reducing the retirement gap by:
1. Making saving for retirement a condition of employment
2. Providing your employees with access to independent financial advice
In this article, our focus is on the latter option. While you are not obligated to provide access to professional advice, choosing to do so is a value-add that can enable much better retirement outcomes for your staff.
Understanding independent financial advice and its value
Independent financial advice is vital to supporting individuals as they make key financial decisions. This includes a wide range of financial planning activities, from addressing day-to-day needs, such as budgeting and building an emergency fund, to lifelong goals, such as working towards retiring comfortably.
For those South Africans who have retirement savings in place, this often forms the bulk of their life savings, which makes receiving guidance on how to manage these funds essential.
That said, many individuals are not aware of the value of advice, believe independent financial advisers (IFAs) are only for the very wealthy and do not know how to go about accessing advice. One way to overcome these barriers, is by contracting an employee benefits consultant for your company. Typically, an employee benefits consultant assists an employer in structuring the best retirement savings and group risk solution for their business, but you can also approach them to give advice to your employees. In instances where employee benefits consultants do not provide individual advice, they tend to partner with and recommend IFAs who do.
How independent financial advice helps to bridge the retirement gap
There are four key ways in which independent advice can result in improved retirement savings outcomes.
A balanced trade-off between short- and long-term goals
Consulting an adviser should not be a once-off event but rather an ongoing process as individuals journey through different life stages. For people who are already saving, financial advice helps put their short-term and long-term financial goals into perspective by accounting for changing personal circumstances and needs. By establishing a long-term relationship with a trusted adviser, your employees can ensure that their finances are aligned to their needs at various points in their lives.
A clear understanding of what it takes to secure a comfortable retirement
Retirement is difficult for most people to visualise. IFAs can help their clients gain a realistic understanding of how they want to live during retirement, what this will likely cost and how much they need to save to achieve their desired outcomes. They can also act as a financial coach, encouraging better investor behaviour and helping employees to stay the course. Your employees would benefit from having access to a professional adviser, who can act as a sounding board when making critical financial decisions.
A suitably structured investment portfolio that incorporates risk profiles and investment horizons
The risk of not seeking financial advice is that it may result in your employees unintentionally making choices that will negatively affect their retirement portfolio. A good, independent financial adviser will not propose a one-size-fits-all solution. Instead, they will consider each employee’s specific situation, risk appetite and time horizon before proposing an appropriate and diversified portfolio.
Navigating the two-pot retirement system
The two-pot system focuses on preservation of retirement investments while allowing members some access to funds before retirement. IFAs can play a key role in educating members about the implications of withdrawing funds from their savings pot, as well as the value of treating their retirement account holistically and remaining invested for the long term.
What to look for in an independent financial adviser
There are a few factors to consider when determining if an adviser or consultant is fitting for your business and your employees. First and foremost, make sure they are appropriately qualified and accredited by the Financial Sector Conduct Authority. Secondly, independence is key: An IFA is not incentivised to promote one product over another, which ensures that any part of the recommended financial plan is in the client’s best interests. Lastly, they should be transparent about their service offering and the fees that they charge.
You can make a difference
Offering retirement benefits gives your employees a step up, boosting efforts to save towards a good retirement outcome. In addition, it can help with recruitment as it makes your company more attractive to potential employees, clearly demonstrating your commitment to their long-term wellbeing. Coupled with independent financial advice, this access can bring comfortable retirement within closer reach for a higher number of working South Africans.
