Financial Literacy: Lessons from SA's Retirement System

Faculty and Staff
24 Oct 2024

In an era of abundant real-time information, the recent changes in South Africa’s retirement system have highlighted the ongoing challenge of ensuring clients make informed financial decisions. These reforms have once again brought attention to the lack of financial literacy among South African citizens. 

However, it did provide us with valuable insights that might be useful as we navigate the new retirement landscape.

Key Learnings Post-Reform

Increased awareness of retirement planning  

The inception of the new retirement system generated a great deal of curiosity and interest by various pension fund members. However, it also became a focal point of contention as various perspectives were shared by the participants regarding the new system.  

The two-pot retirement system became a trending topic among many South Africans who are contributing towards retirement savings. Contrary to what the current withdrawal statistics are reflecting, the efforts taken to educate members on the new system has the potential to change the retirement savings landscape in South Africa.  

Greater awareness accompanied by high-quality and trustworthy advice can exponentially empower fund members to make informed financial decisions. In addition to that, the increased awareness can increase the number of individuals planning for retirement.  

Understanding complex financial products 

Despite significant efforts in consumer financial education, there remains a substantial gap in financial literacy, especially regarding the features of financial products.  

This is supported by many fund members not understanding the fee structure of their retirement investments, the effect of cashing in on retirement savings and the tax implications associated with cashing in on their retirement savings.  

This highlights the importance of basic financial literacy to ensure members do not underestimate the realities that come with the retirement system.  

Financial therapy 

The cashing in of retirement savings might be justifiable given the current economic climate, as many South Africans are drowning in debt due to the rising cost in inflation and cost of living.  

Paying off short-term debt could potentially be one of the key factors for cashing in on retirement savings. This could result in billions being paid out by corporations as well as billions towards to taxes. Despite various attempts by corporations and industry professionals to educate their members, the education provided did not automatically result in a change of behaviour.  

Financial decisions are primarily driven by emotions, and looking beyond the numbers allows us to understand our clients’ behaviours and emotions around money.  

Dedicating time towards understanding the relationship that clients have with money could potentially result in consumer financial education that will result in a change of behaviour regarding their financial decisions.  

Read More: Financial Planning in South Africa: Your Path to Success  

Enhancing Financial Literacy

According to the latest digital data report by Meltwater, there were 45.34 million internet users at the start of 2024.This puts South Africa at the forefront of internet adoption globally. About 60.8% of internet users make use of the internet for online learning purposes.  

This number becomes very significant, especially within the context of financial education. Clients have enhanced access to an abundance of financial product information and financial data.  

This provides clients with a vast amount of information at their disposable; however, the amount of information poses various challenges such as the perplexity to discern between facts and inaccurate information about the retirement system.  

This underscores the importance of high-quality and trustworthy financial advice, and the integration of technology has the potential to further improve the value proposition offered by professionals in the financial services sector.  

Although there have been significant efforts towards consumer financial education, there is a need for greater collaboration between various stakeholders to ensure financially literate citizens, especially in understanding the complexities of the retirement system. 

Final Thoughts

The recent overhaul of South Africa’s retirement system highlights the ongoing need for financial literacy across the country. While these reforms have spurred interest and raised awareness around retirement planning, there remains a significant gap in understanding comples financial products and making informed decisions.  

Bridging this gap requires not only accessible financial education but also an empathetic approach that addresses the emotional factors driving financial behavior. 

To deepen your understanding and improve your financial literacy, explore Milpark Education's comprehensive programs designed to equip you with the tools needed for sound financial decision making. Visit Milpark Education today. 

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Litho Ferreira Junior Lecturer