Saving for retirement is one of those tasks that the majority of people know that they must do, but often choose to postpone to some later date. Sadly, by the time they start saving they have lost valuable time and the powerful benefit of compound interest.
To help people solve the retirement puzzle, Cobus Strydom suggests that they ask themselves the following basic questions:
Is my retirement savings adequate?
To determine if your retirement savings are adequate, you need to determine the “replacement ratio” that you can achieve on your retirement. Replacement ratio compares your expected after-retirement income with your before-retirement income. A replacement ratio of 70% is generally accepted as adequate to ensure a comfortable retirement. To achieve this, studies have shown that you need to save at least 15% of your income over a career of 35 years or longer.
Most retirement funds provide their members with estimates indicating the benefit that the member will receive on retirement at the member’s current contribution rate based on certain assumptions. It is advisable that you find out what your estimated replacement ratio will be and that you take steps to make additional contributions if need be. Although the estimated replacement ratio provided by a member’s retirement fund does not take into account any other savings or retirement provisions a member may have, it does provide a member with a useful starting point to determine whether he or she needs additional retirement savings to reach the 70% target.
Am I making full use of the tax deductions allowed on my retirement contributions?
The following tax deductions in respect of retirement contributions made by members are allowed:
• Member contributions to pension funds – 7,5% of pensionable remuneration
• Member contributions to retirement annuity funds – the greater of R1 750 or R3 500 less contributions to pension funds or 15% of non-pensionable remuneration
• An additional R1 800 per annum for contributions by members to pension or retirement annuity funds.
Members do not pay tax on employer contributions made to pension and provident funds. The employer is allowed a tax deduction of up to 20% of pensionable remuneration
In respect of most employees, contributions between 12% and 15% of their income to retirement products are made as combined employee and employer contributions and therefore the allowable tax deductions for employees and their employers are not fully used. In most cases the employee’s pensionable remuneration is also lower than the employee’s actual income, which provides an opportunity for additional retirement contributions on a tax-friendly basis
If you are worried about the answers to the above questions, everything is not lost and there are ways to improve your position going forward:
You can make additional voluntary retirement contributions via:
• Your employer’s retirement fund (if allowed in terms of the rules of the fund)
• A retirement annuity fund, and/or
• An additional voluntary contribution retirement fund (for example the Absa Consultants and Actuaries’ additional voluntary contribution pension fund).
We recommend that a person first consult a financial adviser if he or she wishes to increase his or her retirement savings by way of additional voluntary retirement contributions.
Additional voluntary contribution fund
The benefits of contributing to an additional voluntary contribution fund (AVC fund) are:
• You can use your full allowable tax deductions -
- If you are a member of a provident fund, you can contribute 7,5% to an AVC fund and get a tax deduction.
- If you are a member of a pension fund and you are contributing less than 7,5% to your pension fund, you can contribute the balance to an AVC fund.
- You can contribute up to R1 800 tax-free to an AVC fund annually.
• If your employer contributes less than 20% to the existing retirement funds in place for its employees, your employer can contribute the balance to an AVC fund via a salary sacrifice arrangement on your behalf.
• You may have more investment choices and/or a wider range of investment portfolios available than those normally provided in standard retirement funds.
• No initial fees will be payable when you join an AVC fund.
• The cost of administration and investment management of an AVC fund may be lower once economies of scale are reached.
• You may, in terms of current legislation, withdraw your total benefit from an AVC fund when resigning from your employment.
Absa Consultants and Actuaries (ACV) has an existing retirement fund that makes provision for persons wishing to make additional voluntary contributions towards retirement. If an employee wishes to become a member of this AVC fund, his/her employer must complete a participating employer application form, which will provide all the employees of the employer the opportunity to become members of the Absa Consultants and Actuaries AVC fund. Employees can then elect to make additional voluntary contributions to the AVC fund via salary sacrifice.