If you haven’t started saving for retirement, you should consider starting now, even if it’s still many years away. The earlier you start saving, the more compound growth you will accrue.
Most people have mixed emotions about retirement. While to some it is the end of their long career, others are more optimistic and see it as the beginning of their golden years.
Approaching retirement can be a daunting prospect and a huge emotional barrier to overcome, especially for the sandwich generation – people typically in their last 10 years to retirement, who are responsible for supporting their own children while also caring for their aging parents.
According to some research, close to 50% of all adults are confronted with this phenomenon. The fact that people are living longer and the fact that children are still dependent long after they have completed their schooling are perhaps the main reasons.
To make things worse, saving for post-retirement medical expenditure is fast becoming a reality for many. What can we do if we find ourselves in these scenarios?
Implementing a sound strategy is the answer, but how do we do this?
Firstly, take charge and be accountable for your actions. Although pension fund rules may dictate that you have reached retirement and are entitled to a pension, the choice to retire from life remains yours.
Some things are beyond your control, but choosing the date of your financial independence, historically known as ‘retirement’, coupled with the most effective way to save for this date, is of crucial importance.
There are three stages during which many people will have to make crucial choices:
- The first is the building up of funds;
- The second is the date you feel confident you are financially independent, and
- The third is drawing down on your capital.
If you have not accumulated sufficient funds, you will be compelled to work longer, to have a second career, or perhaps to turn a hobby into an income-earning business venture.
Taxpayers can claim tax deductions for contributions made to a retirement fund and nothing prevents a taxpayer who contributes to a pension fund from making additional contributions to another retirement fund. Currently, contributions are tax deductible up to 27.5% of remuneration or taxable income, subject to the annual maximum.
The final stage of retirement decision-making is when the balance of the funds must be invested in a compulsory annuity, whether a guaranteed life annuity or a living annuity.
The latter requires more ongoing financial advice on drawdowns and should be carefully monitored, preferably in consultation with a competent financial planner.
What is a retirement annuity?
A retirement annuity (RA) is a potential option for a person wanting to save for a comfortable retirement. While an RA can help you invest for your future, it also currently offers the additional benefits:
Almost no tax: Paying tax on your proceeds is deferred until your retirement, which means there’s a larger balance that will compound, tax-free, for as long as you keep your money invested.
Regular retirement income: At retirement (or when you turn 55), you can currently withdraw up to one-third of your savings out of a RA, as a cash lump sum, tax free for up to R500 000. As per the regulations on RA’s, the remaining amount must be transferred to an annuity account and can be used as your monthly pension.
Early withdrawals in certain cases: Members under the age of 55 may be able to retire early from their retirement funds due to ill health. Where the value of the fund is below R7 000, the full amount can be withdrawn. Persons emigrating from SA can currently withdraw the full value of their retirement annuity. However, it’s important to be aware of the Taxation Laws Amendment Bill tabled by the Minister of Finance on October 28, 2020, which if approved, will impose a three-year waiting period, effective from March 1, 2021.
Flexible payments: You can make monthly contributions, add a lump-contribution (salary bonus or tax return) or, if needed, pause or even stop your RA deposits at any time without significant impact on your investment value. But try to keep your contributions regular, no matter how big or small.
Diversified portfolio: Having an RA gives your investments access to different asset classes and geographical regions.
Safe and sound: Your creditors can’t touch your RA if you become insolvent. No one, other than you and your chosen dependents, can have access to your funds.
Even if you have no discipline, your RA will ‘save you from yourself’ as you cannot access it until you are 55.
This means your savings will only be available when they are most needed and for what they are intended: your retirement income.
Should you pass away, your beneficiaries can choose to receive a share of your RA as a cash lump sum, an annuity, or a combination of the two. The annuity income will be taxed according to the current income tax table. Cash lump sums will be taxed according to the retirement lump sum tax table.
Before making any final decisions, it’s always worth speaking to a professional financial planner about your options.
Errol Meyer is a legal specialist at Standard Bank Financial Consultancy.