Picture: ISTOCK
Picture: ISTOCK

Urban, working South Africans mostly have short-term savings goals and pay too little attention to savings products that could grow their wealth over the long term, the latest Old Mutual Savings & Investment Monitor shows.

The survey shows that 40% of respondents have no retirement savings and 56% are not saving for their children's education.

More than 70% of employed city dwellers save their money in informal schemes such as stokvels, grocery schemes and burial societies, or keep their savings at home or with friends, the survey shows.

Policies that don't grow wealth

The most widely held policies by working city dwellers are funeral policies - more than 70% of South Africans own these policies that offer protection against a future expense but do not grow your personal wealth.

When it comes to using products offered by financial institutions, the survey shows that South Africans tend to favour their bank accounts rather than retirement funds, unit trusts or investments on the stock exchange aimed at growing wealth.

Respondents were asked what they would do if given a salary increase tomorrow. Most said they would save all or part of it, but 86% said they would save it in a bank account.

Lynette Nicholson, research manager at Old Mutual, said the survey showed an encouraging decline in the number of respondents taking out personal loans, microloans and loans from friends and family. She said there appeared to be increasing awareness of the negative implications of taking on debt that didn't improve one's financial situation.

However, according to the survey, we tend to save on a "casual basis", simply allowing a balance to build up in our bank account.

The downside of this is that the returns are often negligible and funds are vulnerable to being raided rather than preserved.

Rian le Roux, group chief economist at Old Mutual, said we needed to be "clever and safe" by setting goals, making plans, saving early and sticking to it.

Bank accounts or stokvels that do not invest in unit trusts or exchange traded funds may suit saving for short-term needs, but you need savings for long-term goals, from which you earn interest that beats inflation. At the current rate of 6%, inflation would almost halve the buying power of R10000 to R5584 in just 10 years, Old Mutual said.

Investing in a bank account will earn a return that only just beats inflation - the long-term average for cash investments' after-inflation (real) returns is just 0.8% and at this rate it would take 90 years to double your money, Old Mutual research shows.

If investing for longer than three years, you could pick a balanced unit trust fund that invests in shares, bonds and cash and earn a return greatly above inflation.

Tax benefits

Returns from these funds vary with the investment decisions of the fund managers, but Old Mutual's research shows that a reasonable expectation is for a long-term average of 5.8% above inflation.

A retirement fund offers tax benefits - you get a deduction for the contributions you make and there is no income tax or capital gains tax on the income earned or capital gains made. The survey shows that just more than 50% of working, metro-dwelling South Africans use a pension or provident fund and about 30% use a retirement annuity to save for retirement.

Le Roux warned that if you were not saving, or not saving enough, you would face a sharp fall-off in income when you retire. He said you should not ignore increasing longevity caused by improved medical technology and healthier lives when you planned how much you needed for retirement.

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