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Your house is not a retirement option

Nor is your business. Here’s why.
Entrepreneurs may be tempted to put money in the business rather than a retirement solution in the hope that it will pay off one day. Image: Shutterstock

You wouldn’t take the risk of gambling your livelihood away – but relying on your business or other assets like your home as your sole retirement income solution isn’t much different. Find out why experts suggest a combined approach to secure your financial future.

Many South Africans are planning to rely on the sale of their business or home to fund their retirement. A Sanlam Reality survey conducted in conjunction with TaxTim in 2019 suggests that business owners are more intent on drawing lower salaries from their businesses now in order to reap the future benefit of growth so that it can one day be cashed in to fund their retirement.

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The survey also suggested that while salaried employees save more towards retirement (16%) than entrepreneurs do (10%), this doesn’t necessarily mean they earn more.

Other indicators in the survey, like medical aid contributions, showed that on average, they were equally financially stable.

This points to the likelihood that discretionary income that could be invested in a secure retirement solution is instead reinvested into the business, in the hope that it will one day pay off by funding their retirement.

The problem with such a plan

It lacks portfolio diversification

Relying only on the sale of a single asset like your house or business to fund your retirement is a dangerous bet to make with yourself.

Whether a business or a house, you’re pegging your retirement value to an asset whose value you potentially do not have control over at the point of your retirement. Meanwhile, markets could plummet and property values could drop; there are so many external factors. If the business crashes or liquidates, the retiree will sit with no capital for retirement and will not be able to retire. Relying solely on these assets is not a viable solution in terms of retirement planning.

Even if you can sell, you’re not guaranteed your price

Having a solid retirement plan in place, and your house, business or other asset as an additional investment is better, as you’re not dependent on the sale of the asset. But ultimately the sale of the asset depends on the market conditions at the time of the sale, and on the buyer. So your property is only the value of what somebody is prepared to pay for it.

It isn’t tax-efficient

If you’ve left an employer to start your own business, it could be tempting to cash in your accumulated provident or pension fund for a cash injection to your new project. However, the tax tables won’t work in your favour. What we see is people under the age of 55 exiting an employment contract and they take their retirement savings. Those are retirement savings that you are now paying tax on at a withdrawal tax rate, which is not as generous as your retirement tax tables.

Further down the line, if you’re relying on your business to fund your retirement, there are further tax implications:

  1. You will not receive the annual tax deductions you could’ve received for your own contributions into retirement annuity.
  2. The sale of your business will be subject to capital gains tax (CGT). It’s important to factor in this tax, which you’ll have to pay off the top of the capital value that you receive from the asset.

You may not even be able to access your capital

If you’re in partnership with other parties, you may assume that they are also going to want to sell the business at the time you’re planning to cash in, and that you’ll be able to unlock the capital that you perceive is going to fund your retirement. This is a recipe for disappointment – and a sticky financial situation.

The value of partnering with a financial advisor

Running a business means that you need an expert by your side to help take care of your personal financial decisions. Your business can hold plenty of financial and personal value to you, but recognising that your retirement needs and your business’s needs are separate is vital to a functional retirement plan. A financial advisor can assist in identifying the risks that could derail your retirement plan, and formulating a disciplined strategy that protects you, your family and your business.

A financial advisor can help you set up a retirement annuity fund membership in your name, funded by your business so that there’s a more disciplined approach.

The business would contribute on your behalf and pay the premium for you.

Alternatively, in the case of a larger corporate, a group benefit scheme could be an option. Depending on the size of the business and the number of employees and contribution, you can set up an employee benefit scheme like a pension benefit scheme and risk cover for you and your employees.

The retirement annuity fund route could be preferable in some cases though, because the business can simply stop contributing if a member or owner leaves, and the business owner can take over the debit order. The tax benefits of a retirement annuity fund also make it an appealing option in comparison to relying solely on the sale of a business at retirement.

Having a proper retirement solution in place means your savings are more tax efficient.

Retirement tax tables will apply to any cash that is paid into your bank account when retiring from the retirement solution. This can be more tax efficient than possible capital gains tax liabilities on the sale of an asset. And the growth is tax-free within the retirement solution.

Suzanne Pope is a business development manager at Glacier by Sanlam.

COMMENTS   29

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Look at how and by what ilk South Africa is governed. The only question you need to ask yourself : What happened to Retirement Annuities in Zimbabwe and you know what to avoid.

Dead right. The above was written by vested interests talking up their product. Given the execrable returns on the JSE the past decade, plus the costs charged by management companies, you’re dead in the water if you thought your RA or SA pension fund was going to be enough to sustain you. You’d better have a Plan B, such as running your own business, if you want to have a comfortable old age. Note: I didn’t say retire. Very, very few people can afford to actually live only on their pension or RA.

Hmmm, like the Sanlam Echo Bonus that gets funded by the additional 4% that gets charged in fees. Smoke and mirrors…

Got the same impression… Written by “vested interests” with 1 view point.

Also who says reinvesting in a business is a bad idea? Or returns less than a pension fund would.

1000% correct. I know first hand, that property owners in Zim (not farms, flats and houses) have done, and continue to do well. In fact, most/any/ all decent accommodation in most of Africa is U$D based.

The problem in SA is the double digit increases in municipal rates and charges v the smaller rental increases which are possible. Property is no longer such a good investment in this country.

I know a few people who lost a ton.
And stable property forms part of a stable economic base… Which zim quote clearly doesn’t have.

Is it just me or do Moneyweb’s top comments get more predictable with every passing day? “…something something ANC something turns to rubbish Africa something grumble moan something…”

It’s like a parody of a 50-something whitey. The lowest common denominator of the MoneyWeb reader. Yet there’s often more interesting stuff that comes in later on.

@MoneyWeb: please shake things up. Just changing the sorting on the comments will help. Better yet do a bit of curation and put your own picks up top.

Nothing more than an advert for FA’s, but who incidentally have failed average Joe miserably, with nothing more than glorified, legal theft with crazy fee structures

Claiming tax efficiency using RAs is disingenuous at best. Having absolute control of all your funds and using it effectively, with proper structures is as tax efficient as they come

Agree, RAs have been misguiding… only to the benefit of the Asset Manager… ask OLD MUTUAL…. their costs have been a thorn in the bush

Tax efficient… But loss making or making really pathetic returns.

Your home is the worse investment you can make. It looses money in real terms then the agent takes over 8% including VAT and you have say 5% transfer fees on your next purchase that is already the over 8% marked up to pay the agent.

House prices don’t go up fast enough to pay agents those large totally stupid and undeserved commissions.

You have to buy and sell without an agent to sometimes just break even. Go work it out.

Owning is a forced saving and it pegs where you live and pretty much the rent you will be paying for the next 10-20 years. Its a no brainer

Agree, that you should own a home. but investment? not in south Africa. Historically, residential property on average increased with inflation plus 1%. Also municipal rates and taxes increase above inflation every year crowding out capital gains. Therefore, by moving once, the the agent fees and transfer costs confiscates on average 13 years of capital return. If you sell your home for R2 million to buy another home for R2 million, you will be R200 000 poorer with nothing to show. However, the estate agent, government and attorneys will be wealthier.

Negotiate on sale, it does not have to be 8%

Me doubts they’ll be many people wanting to partner with Suzanne or Sanlam in the near term due to their morally bankrupt attitude towards the hospitality industry.
I guess there’s plenty of restauranteurs/hoteliers out there who had retirement plans built around their business many family owned & ran.
Too early to tout for business me thinks…!!!

I think you mean Santam who tried to shaft the hospitality industry when Covid hit

Morning Dude.
Yeah agreed on the name however Sanlam have 60% holding in Santam.
Do try to keep up..
Have a great day further.

This is half baked and not good advice.Even the Headline is misleading. Your home is a huge retirement asset if you have no debt on the house when you retire and you can thus basically live rent free. Anybody who thinks differently should try and retire with a huge bond on their house or not owning your own house to live. Speak to any retired person who does not own a home and they will tell you it an absolute disaster.I know a few,

Depends on how you want to live. You can rent for much lower (in normal cases) than your bond payment, plus taxes and levies, plus insurance etc and if you are willing to live in a smaller dwelling your savings will be even more. The savings, invested correctly can give you a nice 10% return, compounding that over a 30 term it is a lot of money. Take that further and you are now retired, you are still living in a small dwelling with affordable rent. You now have a good living. Compare that buying a 3 bedroom house and living in it for “free” but you still have to do the maintenance, pay the insurance, pay the taxes and levies and suddenly it is not that “Free” anymore. You can sell for a “profit” but only a profit is you are willing to buy a smaller dwelling to have some change in your pocket. Sell to buy the same type, you will lose unfortunately. So, no, depending on how you look at it, the house that you are staying in, even though you bought it cash, is not a given that it will be an asset.

This article is nothing but a sales piece by Sanlam. 95% of WORKING South African’s will not have enough at retirement. That’s after these insurance companies have been selling products for over 40 years?????????Anyone smell a rat??

In order to save enough for retirement, you have to be employed for at least 35 years of your life. In that time you have to contribute a very high percentage of your salary to a retirement fund at all times. When you change employer, you have to preserve those savings and not cash it out for short term needs. You also need to keep your investments in a fairly aggressive balanced fund strategy at all times, not trying to time the market. And then lastly, you need to pay reasonable fees. So there is a lot of responsibility on the individual, not just the insurance company that provides a product like an RA or the asset managers appointed. It is a team effort and very few people get all of the above right their whole life.

Just another fund manager trying to justify its existence.

Well obviously! You have to stay somewhere! My parents did the calculations and found out if they sell their home for 30 years and move to a ‘smaller’ place, they will make nothing and would have to pay in.

Do not be fooled by the bankers that property is the best investment in SA. After all the taxes, municipal rates etc., you will be at a loss

Suzanne. Read up on Reverse mortgage. Whilst not for everyone and and not available in South Africa (to my knowledge) a paid of home can be a very good retirement asset.

Also read up on the massive negative impact advice and asset management fees at the current rates prevailing in South Africa, treasury actually published a great study on this a few years ago. Understanding that, you might place less value of partnering with a financial advisor.

Property is NOT an investment but you have to live somewhere right? So u might as well own it. Owning a property is just good for your credit record.
As for FAs I can only say if u want to lose money you dont need an FA you can do that yourself. Rather educate yourself ..its not rocket science and take charge. Get a decent tax consultant. Lastly ensure your kids become financially independent asap instead of being leeches and living at home till they 30…just saying…

Good advice, much better than the article.

Why does this not say ADVERTORIAL.

There are however some good points in the message. The main one being diversification. Not all your eggs in one basket. If you have a single big asset which you need to dispose of when you decide or need (Health issues, your business goes under or is no longer relevant) the time may not be right but if you have some savings to carry you over for a while you are less likely to be forced into action you don’t want to take. On the business front and working beyond 60. The challenge is to run a business which is likely to still be relevant for 20+ years (big challenge as if it is a good idea competition will pop up). Health is important if you want to work beyond 60 and also a succession plan (possibly family members with the same drive, interest and enthusiasm).

Most of us have been adversely impacted by Financial Advisors and the performance of highly paid Investment Professionals but there are some fairly transparent investment vehicles which provide access to the markets both local and globally and they could be an important part of a diverse portfolio.

End of comments.

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