At the end of the tax year, retirement planning is highlighted as many clients are submitting their tax returns and working out ways in which to save on their tax. Retirement planning should hardly be seasonal but rather a lifelong commitment that starts
Resolve to get your retirement plan on track with these simple resolutions.
Resolve to understand your retirement savings
You may have a pension fund or a provident fund, a preservation fund or a retirement annuity, or even a combination of funds. What are the differences between the various funds and how should you be saving for your retirement?
A pension or provident fund is a benefit offered by your employer. You, as the member, and possibly your employer will make a contribution to the fund every month as part of your salary package. However your membership of the fund is linked to your employment and if you leave your employer, you will normally leave the fund. In this case you would have the option to preserve your benefit or take the funds in cash, after the applicable tax has been deducted. If you choose to preserve your benefit, you could do so by transferring the funds to a preservation fund. This is basically a fund which will run in the same manner as your pension or provident fund, but is not linked to your employer.
A retirement annuity on the other hand is a policy taken out individually. It is not linked to your employer and is fundamentally your own private retirement savings plan. You can contribute to your retirement annuity on a regular basis and add funds when you choose to, making it a flexible choice.
In either of the above cases, the funds will be invested in an investment portfolio of your choice (subject to legislative limits) which is hopefully in line with your risk profile, taking into account factors such as the number of years you still have to save until retirement and your risk appetite. The funds will hopefully grow at a rate outperforming inflation, giving you a real return and accumulating capital.
Summary of the basic differences between the various types of retirement fund
Pension Fund |
Provident Fund |
Retirement Annuity |
Preservation Fund |
|
Can the funds be accessed prior to retirement? |
Not while you are a member of the fund, however you will have this option when you leave your employer |
Not while you are a member of the fund, however you will have this option when you leave your employer |
No, the funds are generally tied up until retirement[1] |
You have the option of one withdrawal prior to retirement |
On retirement how much of the capital can I access as a lump sum? |
You may access up to 1/3 of the amount as a lump sum |
You may take the full amount as a lump sum |
You may access up to 1/3 of the amount as a lump sum |
Depends on whether the funds initially came from a pension or a provident fund |
What happens to the balance of the capital? |
The balance will buy you an annuity which will provide an income for your retirement years |
Any balance not taken as a lump sum will buy you an annuity which will provide an income for your retirement years |
The balance will buy you an annuity which will provide an income for your retirement years |
The balance will buy you an annuity which will provide an income for your retirement years |
Resolve to get the most out of the tax breaks offered by SARS
One of the ways in which SARS incentivises clients to save for their retirement, is by offering tax breaks. In the 2010 Budget Speech, the Minister of Finance announced that certain far reaching changes could be expected to these tax breaks, which would have a significant impact especially on higher income earners. This included subjecting employer contributions to retirement funds to fringe benefit tax, limiting all retirement fund deductions to 22.5% of taxable income with a ceiling of R 200 000 and restricting lump sums from provident funds to 1/3 of the share of fund. These proposals have not yet been implemented and we await the outcome of further discussions for further clarity. However in the meantime it would be frivolous for us to waste the tax breaks that we do have, while we have them.
Retirement Annuity |
Pension Fund |
Provident Fund |
Preservation Fund |
|
Tax saving opportunity |
Each year taxpayers qualify for a deduction of the greater of R 1750 or R 3 500 less any contributions to a pension fund or 15% of non retirement funding income |
Up to 7.5% of your remuneration qualifies for a tax deduction |
Personal contributions to a provident fund are not deductible, but are currently allowed to be structured as a salary sacrifice. |
Transfer from a pension or provident fund to a Preservation Fund is tax free |
Resolve to pay yourself first
A quick calculation will show that you need at least ten times your annual salary at retirement in order to achieve 80% of that salary adjusted for inflation and so to maintain the same standard of living post retirement. You should be saving 18% of your monthly salary from age 25 if you invest it in a typical balanced fund (more if more conservative), and if you have left your retirement savings a bit later, this figure increases to a required saving of 40% if you are over 40 years of age.
Looking at it from a different perspective: how many paydays do you have left before you retire and how many paydays are you saving for? The following example illustrates the point. A male client currently aged 40 has selected his retirement age as 60 years. Thus he has 240 paydays left until retirement. At first glance this seems like a lot of opportunities to save and plan for his retirement years. However with a life expectancy of 75 years, he needs to provide for 180 pay days during retirement. It is clear that for the average client, this type of capital cannot be accumulated in a short period of time and requires years of contributions and compound growth in order to be sufficient.
Resolve to preserve your benefits in the event of a change in employment
Whatever the reason for changing your job, it is stressful. In fact it is listed as one of the top five stressful life events. Changing jobs comes with some big decisions and a lot of paperwork. One decision that you will have to make is what to do with your pension or provident fund. It might be tempting to withdraw the funds and pay off your bond, take the kids on that holiday you’ve always wanted to or just settle up a few odds and ends. But don’t be tempted to squander your fund benefits. The value of the compound interest you have earned in the fund, especially if you were with your previous employer for some time, should not be under estimated. Satisfying a short term goal now could result in a significant shortfall at retirement. Speak to your financial advisor and consider transferring your pension or provident fund to a preservation fund.
Resolve to review your portfolio on a regular basis
Retirement planning is something that unfortunately cannot be ticked off the list and then forgotten about until the day you retire. It is a process that you will work through throughout your life and your plan needs to be flexible to change with your changing circumstances. Your plan will evolve as you move through the various stages of life, as your appetite for risk changes and as you get closer to retirement age. Make the commitment to review your retirement plan at least once a year. Use this as an opportunity to not only take care of the housekeeping issues such as updating contact details and reviewing beneficiary details, but also to review your investment strategy and portfolio choices.
Leon Trotsky said that “Old age is the most unexpected of all the things that can happen to a man.” Somehow we have our whole lives to plan for this eventuality and yet we delay until it is just too late. Retirement planning is about planning for longevity and making sure that we have the funds in place to live out our retirement years with a comfortable standard of living and few financial worries.
[1] Funds from retirement annuities may be accessed prior to retirement in certain instances such as in the event of divorce or permanent disability