Lack of savings culture has consequences

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We don't compare well internationally either - even compared to other BRICS countries South Africa has the lowest savings rate at 13.5% with a household savings rate of just 1.7%.

The adult salaried population may have grown in the past decade from 7.2 million to 12.4 million, but that's little comfort as the dependence on government grants has grown significantly in the same period from 19% to 30%, according to the recently released FinScope Consumer Survey South Africa 2014. Of particular concern, notes the survey, is the fact that only 44% of salaried individuals have long term savings or retirement products.

But a lack of a savings culture has consequences; according to a recent Moneyweb report only 29% of South Africans of retirement age with retirement funds are able to maintain their standard of living when they retire, while more than half of individuals over the age of 60 qualify for old age social grants, clear indications that South Africans are not saving enough.

High level of debt

There are a number of reasons for South Africa's lamentably low levels of savings. Firstly, South Africans still have a high level of debt as they face increased pressure of higher interest rates and debt repayment. Household debt continues to be a problem locally as disposable household income grows below inflation.

Factor in a SARS estimate that only two million individuals earn over R250,000 a year and it's not hard to see why South African consumers are under pressure and not saving sufficiently. These factors have, in turn, forced many South African households to rely on retirement savings to cover cost-of-living expenses and to meet their investment needs.

Recent figures reveal that more than 57% of consumers are delinquent in debt - meaning that their debt is more than 30 days overdue - while impairments are at their highest level since 2009. Compare this to US figures where just 35% of consumers are delinquent in debt (and this is considered a significant problem) according to an Urban Institute study released in July.

This situation is exacerbated by the current pensions industry which allows for a great deal of leakage and does not encourage a savings culture. Perceptions that government will nationalise pension funds and uncertainty around the Government Employees Pension Fund (GEPF) haven't helped matters. Contributions to pension funds has decreased in the past year from 4.8 million (13%) to 3.9 million (11%).

Changes expected

That could all be changing going forward, as government reviews current practices with the aim of enabling an improved retirement income, increased preservation, portability and governance. The reviews are set to improve tax incentives, execute some much needed reform within the local retirement fund landscape, and create new savings vehicles such as the non-retirement Tax Free Individual Savings Accounts - publicly available next year - which will carry no tax on capital gains, interest or dividend income.

Providing more education around savings, as well as making easily understandable information accessible, will help South Africans to compare the savings options and assess the risks. Only a small percentage of South Africans seek financial advice from professionals such as financial advisers or their bankers when making investment decisions. Many potential investors don't seek out professional advisers believing they don't have sufficient assets to warrant appointing an advisor.

In countries such as the UK consumers are taking a more proactive approach and increasingly comparing and investing in bank and other savings products directly via aggregator websites. This practice has not yet taken off in South Africa.

Cash investments

Investors who are looking to save should consider cash investments. Cash investments are particularly relevant for investors who don't want their funds tied up for the long term and have short term savings goals - up to three years. It's one of the safest places to enter the savings world. While cash returns can appear less exciting compared to more volatile equity markets, the reality is that many investors these days are choosing the safety and stability of cash as they wait out unpredictable equity markets.

In fact, one of the world's most successful investors, Warren Buffett, has long appreciated the optionality of cash. According to one of his biographers he considers cash as a call option with no expiration date.

Cash is not boring and it should not be considered merely as an asset class with low returns. On the contrary, in uncertain financial markets cash provides investors with greater flexibility and guaranteed returns.