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Old Mutual comments on lump sum retirement payments

10 Mar  2006

However, Grant Pote, GM Corporate Solutions - Research and Development - at Old Mutual, says that the realities of the retirement savings environment in South Africa must be recognised.

These realities include:
  • Retirement accumulations are sometimes very small, and could provide minuscule pensions, especially in a low interest environment.
  • The old age pension means test that the governments social grants are based on, can currently act as a disincentive to taking retirement savings in income form.
  • Employees often retire from formal employment in circumstances where they must continue to work, and lump sums can assist them in establishing small businesses.
  • Life crises affect large numbers of employees whose only major financial resource is often the retirement savings.
  • Credit for housing has historically been difficult for large numbers of employees to obtain, and retirement funds have filled that gap.
Pote says that importantly, most, if not all current retirement savers have explicitly or implicitly made retirement plans on the premise of the availability of at least part of these savings in lump sum form at retirement.

"Retirement saving is a long-term project, and it is simply not possible to revise such planning in a relatively short five year period. In 1998, government recognised the importance of preserving "vested rights" for savings already accumulated, when the tax treatment of lump sum benefits under public sector and municipal funds was changed to harmonise it with private sector treatment. In that instance, the tax free lump sums accumulated to the date of change were preserved."

Pote says it may therefore be appropriate to;
  • Continue to allow a portion of retirement savings to be taken as a lump sum, but to incentivise income over lump sums. An alternative might be to provide that a minimum amount of retirement savings be applied to income to ensure a minimum annuity, with the remaining balance allowed to be taken as a lump sum.
  • Preserve concessions for existing members, at least for a reasonable time to allow replanning, although it may be advisable to simplify some of the existing tax rules to ease administration burdens.
Pote adds that it would certainly not be appropriate for fund members to attempt to exit funds out of fear that they may not be able in future to obtain lump sum benefits.

Old Mutual Life Assurance Company (South Africa) Limited is a Licensed Financial Services Provider
Physical Address: Mutualpark, Jan Smuts Drive, Pinelands, 7405, South Africa
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