Why wait for "RA season"?

01 November 2009 Pierre Jean Marais, Momentum

Traditionally, the financial services industry regards February as "RA season" - the time when financial advisors assist clients in determining whether a contribution to a retirement annuity fund may result in a tax saving in the specific tax year. But the imperative to save is too pressing to wait until February.

The Income Tax Act allows taxpayers to deduct from their taxable earnings, within limits, contributions made to a retirement annuity fund. This concession, together with the fact that there is no income tax or capital gains tax payable within a retirement annuity fund, make retirement annuities ideal vehicles to build retirement capital.

Now is the time

Due to the fact that the low level of national savings, and its impact on people's ability to maintain their standard of living in retirement, is one of the pressing issues currently being debated in South Africa, there is no better time than right now for financial advisors to interact with their clients on the issue of retirement planning.

Aproximately 6% of people will be financially independent at retirement, as statistics show, then 94% of people urgently need to implement a retirement plan, or review and upgrade their existing retirement plan.

High debt levels, spurred by the need for instant gratification, as well as the global financial crisis, strained disposable income and the ability to save. Some people are postponing the commencement of retirement and savings plans until conditions improve, a decision which can cost them dearly because of missed opportunities. Furthermore, the "this-is-too-far-into-the-future" attitude towards retirement also prevents many people from starting to save.

Role of the advisor

Financial advisors play a crucial and indispensable role in educating people about the importance of saving and the obvious benefits of starting early. Consumer education, outlining clear and precise impact scenarios resulting from inactivity or savings lethargy go a long way towards illustrating the risk. Only once a financial plan has been developed, can it be ascertained what needs to be done to execute the plan and reach financial goals.

Financial advisors can further assist their clients by helping them to implement an appropriate savings strategy to secure a comfortable retirement.

Tools for brokers

There are a number of tools available to brokers to assist them in illustrating to clients the necessity of saving and the impact on their provision for retirement should they delay the implementation of their retirement plan.

An example

Consider a 35-year old client earning R30 000 per month who wishes to retire at the age of 60 with an 83% replacement ratio increasing by 8% per year from age 60 to age 79. To sustain the client's income need in retirement, capital of R34 779 406 needs to be accumulated over a period of 25 years, which requires a R10 700 monthly contribution (with a 10% annual contribution growth) towards retirement. Should the client postpone the implementation of the recommended retirement plan by 12 months, the cost of delay will amount to R1 391 177!

Innovative savings concepts

From a financial services industry perspective, it is increasingly important to develop strategies that encourage people to start saving money on a regular basis as early as possible while also satisfying the need for instant gratification. Brokers should also provide their clients with advice regarding some of the innovative savings products available to boost their savings.

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