Don’t neglect your retirement savings in these tough economic times

The global economic turmoil has left many investors feeling shell-shocked and uncertain, but it shouldn’t be a surprise that now is a crucial time for investors to remain focused on the long term and be disciplined about saving for their retirement, says Johan de Lange, director at Allan Gray Unit Trust Management Limited.

And retirement annuities (RAs) that give access to a range of unit trusts are one of the best savings vehicles for retirement, he says.

“When you have unit trusts as your underlying investment for a retirement annuity, it makes an ideal investment vehicle for long-term savings. The regular contributions over a long period help smooth out the inevitable ups and downs of the market – especially if contributions begin early on in your working life and continue every month,” says de Lange.

An investor can select from unit trusts that invest in one ‘asset class’ such as shares, bonds cash or offshore investments. For those investors who do not wish to make the decision about which asset class or combination of asset classes (i.e. how much shares, bonds or cash) they should hold, there is the option to delegate this decision to a professional investment manager.

“If you prefer to have an investment manager make the asset allocation decision for you, some unit trusts do this and offer varying amounts of exposure to the different asset classes to meet varying risk appetites.” These unit trusts are generally referred to as asset allocation funds.

De Lange says the benefit of RA’s is their tax efficiency, and this is the reason investors may wish to consider an RA instead of just investing in unit trusts.

“If you don’t contribute to a pension fund, you can contribute 15% of your taxable income to an RA tax free. If you do currently contribute to a pension fund, you can contribute 15% of any income that’s not taken into account when calculating your pension contribution tax-free. And any additional payments you make may be carried forward and offset against future taxable income,” de Lange explains.

When you retire you have to invest a minimum of two-thirds of your capital from your RA into a pension-providing vehicle such as a living annuity or guaranteed life annuity. And you do not have to pay tax on the transfer of your capital into these products.

“The annual pension you receive after retirement is taxed at your marginal rate, which is likely to be lower than your tax rate prior to retirement,” he says.

Even if you are already a member of a pension fund or provident fund, says de Lange, you may wish to supplement these savings in a tax efficient way. For example, if you earn a variable income from any ad hoc bonus or commission payments, these payments may not be taken into account when your contributions to a pension fund or provident fund are calculated.

“An RA in this case may be a suitable way for investors to supplement their retirement savings with this additional money,” concludes de Lange.