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Don’t leave your RA in SA – how inflation eats away at your retirement income

By February 9, 2022October 11th, 2023FinGlobal

Don’t leave your RA in SA – how inflation eats away at your retirement income

February 9, 2022

For many South Africans, inflation isn’t something they think about often beyond hearing it mentioned occasionally on the news. However, the impact of inflation on our financial lives is something that we should be paying more attention to – especially when it comes to retirement planning. Not only does inflation affect the price of consumer goods, but on an individual level, the inflation rate affects how much your retirement annuity savings will ultimately be worth. Over time, inflation can take a serious chunk out of the nest egg intended for your golden years. With this in mind, let’s take a look at what you need to know about inflation in South Africa, and what this means for you if you emigrated, leaving retirement annuity savings behind.

What is inflation?

Inflation refers to the rate at which goods and services increase over time. Remember when you could get a Junior Cheeseburger from Mickey-D’s for R5? Today that same burger costs four times more. It’s still the same burger, it just costs you four times more to buy it now than it did ten years ago.

How is inflation measured?

Inflation in South Africa is measured according to the Consumer Price Index or CPI, which tracks average individual living expenses. Adding the costs of a predetermined ‘basket of goods’ and services required by the average South African, inflation is calculated by measuring the price climb in this ‘basket’ over 12 months.

What causes inflation?

A number of different factors play into inflation in South Africa – the biggest of which is demand inflation. If the demand for a specific product or service increases due to limited availability, its price will rise. Another type of inflation is called ‘push inflation’. This is a knock-on effect where the price of goods rises due to a cost increase somewhere in the value chain. When production costs go up, the price of that product goes up to ensure producers can still profit from their goods. The main factors influencing the cost of production usually include the price of oil, the rate of exchange, and the cost of salaries.

Other factors contributing to inflation include the price of imported goods and petrol. When the price of petrol goes up, not only are you getting less fuel in your tank for the same amount of money, but it also has an indirect impact in that an increase in petrol price leads to an increase in transport costs, which will impact the cost of all goods and services that rely on transport. Sadly, this is almost everything.

What impact does inflation have on your retirement annuity?

While inflation does not reduce the money you have saved in your retirement annuity, it does reduce what you can buy with it. As the cost of living increases steadily, you will be able to buy less with the money you have.

What does this mean for your annuity income? This is supposed to be the income that you receive regularly over the course of your retirement. It’s the reason you’ve spent most of your working years squirreling away funds so that you could have enough money for a stress-free retirement.

Once you stop working and retire from your RA, your income is paid from the annuity that you are obliged to purchase using two-thirds of your retirement savings. This kind of annuity is usually either a:

  • Living annuity: which is an investment product that allows you to specify your annual income drawdown and adjust this percentage once a year.  The risk here is that it’s possible to outlive your retirement savings.
  • Guaranteed life annuity: which is aninsurance product that pays out a fixed income for the remainder of your life but has no option to change the income on an annual basis. The risk here is that the buying power of your money will not keep up with the rising cost of living.

Read more about the pros and cons of living vs guaranteed life annuities.

To understand the impact of inflation on your retirement savings, consider this scenario in which a fixed (guaranteed) life annuity that pays out (for example), R10,000 monthly:

  • This annuity amount will remain permanently unchanged at R10,000 per month.
  • Bearing in mind that if the annual inflation rate is 4.5% (midpoint of the inflation target range) then a basket of goods/services that cost R10,000 last year will cost you R10,450 a year later.

Inflation diminishes your money’s purchasing power because you’ll need an additional R450 the following year to buy the same basket of goods and services.

  • The risk of inflation eroding the purchasing power of your retirement income becomes greater over longer periods of time.
  • Using the same example, over 10 years the cost of the same hypothetical basket will rise from R10,000 to R15,530 – an increase of 55%.
  • Receiving a fixed annuity income means that at some point you’ll find that the level of income does not keep up with the rising cost of goods.

To avoid these scenarios, it might be in your best interest to cash in your South African retirement annuity.

  • It is no longer possible for expats to use formal emigration through the South African Reserve Bank in order to gain immediate access to retirement savings.
  • Tax emigration through the South African Revenue Service is now the process by which expats can access and withdraw their retirement savings, once they show they have ceased tax residency in SA and maintained this non-resident position for a period of not less than three consecutive years.

What are the benefits of withdrawing your retirement annuity from South Africa before you reach the age of 55?

  • Protect your retirement savings from the shrinking effect of inflation as well as from the volatility of the Rand.
  • Once you’ve paid tax and administrative penalties, you can access the full amount of your funds and transfer these abroad.
  • You are free to use these funds as you see fit, there is no longer any obligation on you to use the money to purchase or invest in any other retirement products.

FinGlobal: retirement annuity encashment specialists

If all of this sounds to you like a lot of paperwork and admin,  you’d be correct. That’s where FinGlobal would love to be of assistance to you. We’re ready to handle your:

Leave us your contact details and we’ll be in touch to discuss your options for protecting your retirement funds.

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