Are your clients saving enough for their retirement? Statistics indicate that only 4% of South Africans who are 45 years old today will be able to live comfortably during retirement.
But how much is enough? This depends on age, financial circumstances and on the level of financial comfort in which your clients want to spend their retirement days. Consider the following table that indicates the percentage of your client's salary that must be saved to retire on 75% of his or her final salary at age 65.
Starting age % of salary you need to save to retire on 75% of final salary (age 65)
25 12.5%
35 20%
45 35%
Assumptions - Net return: 9% pa; CPI: 6%; life expectancy: 80; salary and contribution increases in line with CPI.
Comfortable retirement requires a sound financial plan and committed implementation, the sooner, the better.
Case study
John is 35 years old, earns R20 000 per month, and has changed jobs several times, each time using his pension fund to settle debt. Consequently, he has not saved anything for retirement.
Through his current employer, 15% of his pensionable salary goes towards a pension fund (his pensionable salary represents two thirds of his total cost to company, the rest being made up of bonuses).
The table mentioned above indicates that if he wants to retire at 75% of his final salary at age 65, he would initially need to save R4 000 per month. However, his pension fund contribution amounts to only R2 000 per month. If he does not augment his pension fund savings, John will only retire at 37.5% of his final salary.
The RA solution
A retirement annuity (RA) provides a solution for several reasons. The first is that the contributions are tax deductible. The Receiver subsidises or sponsors a big portion of your clients' savings, up to certain limits. This benefit makes RAs worthwhile, tax-efficient and popular long-term savings vehicles.
RAs provide pensions for people who are self-employed, while prudent employees can use them to supplement their company pension or provident funds.
Premiums are tax-deductible up to the higher of:
* 15% of the member's non-pensionable taxable income, or
* R3 500, less the deductible pension fund contributions, or
* R1 750
In the case study below, an RA of R1 000 per month will be tax deductible, meaning that the Receiver will subsidise R300 out of every R1 000 John saves towards retirement (on a 30% marginal tax rate), i.e. John will get R300 per month back from the Receiver by choosing to save through an RA.
Other advantages
The other advantage of RAs include:
* No tax on investment returns: the interest-bearing component of the investment returns incurs no tax, compared to 30% within an endowment or up to 40% in the case of unit trusts. Furthermore, no capital gains tax is currently payable within an RA fund.
* Protection against creditors: the proceeds do not form part of the insolvent estate and therefore creditors cannot attach them.
* Disciplined savings: members cannot access funds from the policy before age 55, nor may they pledge, cede or surrender the RA.
* Estate duty savings: the capitalised value of annuity payments will not be liable for estate duty.
However, not all RAs are the same. Look out for an RA that offers maturity bonuses, cost savings and a unique retirement booster, which means more money in your clients' pockets at retirement.