The Pre-Retirement Path to your Golden Years …..
South Africans are notoriously bad at saving and investing. The result being that very few of us retire in comfort and the bulk have insufficient funding in place to maintain a good standard of living.
According to recent independent surveys conducted, the number one fear for retirees is outliving their money. So, what is the solution? The short answer is that you need to become adept at setting money aside, on a regular basis, preferably from your very first pay-cheque. You cannot hope to solve a pre-retirement problem with a post-retirement solution and the only way you will have enough to live out those golden years is by being consistent, dedicated, and realistic earlier on in life. If you consider just how long you may live after you have retired – this can be a daunting thought.
One of the best ways to invest for the long-term is a retirement annuity (or RA). Whether you are self-employed or a full-time employee (even if you have a pension or provident fund at work), a personal RA is a tax efficient and affordable route to follow. RAs are funded with pre-tax money and you are allowed to contribute up to 27.5% of your taxable income, capped at R350 000 per annum. There is no tax on the interest or dividends earned on the underlying investment funds, no capital gains tax, and, at retirement, any fund value which you utilise to purchase a life or living annuity transfers over free of lump sum tax.
An RA should be tailored to your investment risk profile – with your needs, wishes, age and personal views all considered when the plan is first set up. The minimum age to access this type of investment is 55 – your money is therefore protected against you laying your hands on it earlier and it is also protected (by law) against creditors … which is just another great reason why we believe it makes sense to have at least one RA in place. (The only early access allowed to an RA is in the event of your death (whereby your nominee/s will be paid out), at permanent disability or upon official emigration).
With most RA’s being long-term, committed types of investments, many clients are anxious to know what happens in the event of a retrenchment, maternity leave, sabbatical, etc? Generally, assurance companies do offer bridging holidays which allow for non-contribution (obviously on a non-tax-deductible basis) for a limited period.
At maturity, your RA pays out up to 1/3 as a lump sum, with the other 2/3’s being utilised to purchase a compulsory annuity income. You could also use the full fund value to buy an income – but you cannot access the full fund value. Current tax legislation allows for the first R500 000 of this money to be paid out tax-free.
In brief:
- Contributions to an RA are tax deductible
- You do not pay any tax on the growth within the fund whilst investing
- Proceeds are treated in a tax friendly manner at retirement
- The fund value remains safe from creditors
Staying committed is not always easy – but it is worthwhile, and your older self will be grateful if you start investing towards retirement now!
By Debby Badenhorst (Senior Financial Planner)