Q: I am a 50-year old female and only recently got a permanent job. If my health allows me, I’ll continue to work until I’m 65. I’ve never had the luxury to save for my retirement and want to contribute to a fund now. I can afford R800 to R1 000 a month. I realise this is very late, but I’m desperate to do something. Is this possible?
Sonia du Plessis - Brenthurst Wealth
It is never too late to start saving towards your retirement. To be realistic though, you will not be able to retire comfortably at the age of 65. Having started late with retirement savings will mean that, if your health allows, you will have to work past the age of 65. These days, people in general have a much higher life expectancy, this is mainly because of advances in the medical industry. This also means that people, at the age of 65 can work longer and not retire like one would traditionally do. You will have to prepare yourself mentally for that and know that you will most likely have to try and work as long as possible.
I would recommend that you save the R800-R1 000pm in a unit trust-based retirement annuity (RA) vehicle. I would also strongly suggest that you add an automatic annual premium increase of at least 10%-15%. If you have saved up some funds already you can consider starting your RA with a lump sum to give your monthly savings, going forward, a boost. I would recommend that you have a thorough review of your budget, see if you can’t save more towards retirement, than the planned R800-R1 000pm. You are starting late with retirement savings, therefore the more you save the better. This will mean you will have to cut on unnecessary luxury expenses, for example DStv, eating out, beauty treatments.
I would also advise that you contact a financial advisor, he/she will be able to assist you with your retirement planning and make sure you are not making unnecessary financial mistakes. You are in a phase of your life where you can’t afford to make errors with your money and will have to make it a priority to at least review your financial situation once a year. A financial advisor will also be able to assist you with the unit trust selection, for your RA. It is important for you to be comfortable with the amount of risk being taken within the product and for you to understand the positives and negatives around a RA. Only after that will you be able to make an informed decision.
Tax wise, having a RA has big benefits. I’m assuming now that you fall into at least the 18% tax bracket, meaning you earn an annual income over R75 000 per annum. You will qualify for a tax deduction of up to 27.5% of taxable income (subject to a maximum of R350 000 per year). This limit applies to the total contributions you make to all retirement funds in the tax year. You can therefore get the tax paid, on 27.5% of your income back from Sars.
Payments you make to your retirement annuity will be from after tax monies, and you will therefore only receive the tax back from Sars after you’ve submitted your annual tax return. You can consider using the money that you will receive back from Sars to do an annual top-up on your RA.
Busi Lekuba - Masthead Financial Planning
A retirement annuity is a retirement fund in terms of the Pension Funds Act. It is a tax-effective investment vehicle and the best way for having a committed plan for saving for retirement provision. You can only access the capital at the age of 55 if the funds are above R7000. At retirement you will get a third cash and the two thirds must provide an income if the amount is above R247 000. If not you will get all your fund value as cash. Your contributions are tax deductible up to 27.5 % of your taxable income limited to R350 000 pa.
For you, I think a retirement annuity is not ideal as the investment term is short and you are contributing less. You need to invest into a unit trust because you will get all your capital at the age of 65 and there are no charges if you stop contributing at any time.
The unit trust is not tax deductible, the money is easily available and it is my opinion that you will be at an advantage if you invest into a unit trust that does not restrict you. If you lose you job or you health changes, you can use the money in any way that you like without any limitations.