Five resolutions for a comfortable retirement
29 February 2012 is the last day in the 2011/12 tax year. This date is important to taxpayers as it represents the cut off between one tax year and the next. The revenues you earn and deductions you claim up to 29 February this year belong to the current
“Retirement planning is highlighted at the end of each tax year, as many clients look for ways in which to save on their tax,” says Michelle Human, Legal marketing specialist at Liberty. Although retirement planning should be a lifelong commitment, beginning with your first paycheque, it is never too late to start. As this tax year blurs into the next we thought it prudent to consider Human’s article Retirement Planning Resolutions, in which she proposes five simple resolutions for savers to get their retirement plan on track.
Retirement resolution one: Understand your retirement savings
It is amazing how many employees contribute to pension or provident funds without the slightest clue of the underlying investments, projected lump sum at retirement or tax implications. The first step is to know what type of retirement savings instrument you are invested in. “You may have a pension fund or a provident fund, a preservation fund or a retirement annuity, or even a combination of funds,” says Human. She outlined two retirement “scenarios”.
Scenario one (employer-linked savings): Many employees belong to a pension or provident fund as a benefit offered by their employer. You, as the member, and possibly your employer will make a contribution to the fund every month as part of your salary package. Membership of this fund is linked to your employment and if you leave your employer, you will normally leave the fund too. 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 – a fund which will run in the same manner as your pension or provident fund, but is not linked to your employer.
Scenario two (additional savings): A retirement annuity is a policy taken out individually. It is not linked to your employer and is 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 each of the above cases the funds are invested in an investment portfolio of your choice, subject to legislative limits and in keeping with your risk profile, which is in turn linked to the number of years you until retirement. These funds will hopefully provide returns in excess of inflation to ensure sufficient capital accumulation at retirement.
Retirement resolution two: Get the most out of the tax breaks offered by SARS
SARS offers few incentives to retirement savers. And the 2010 Budget Speech hinted at these limited incentives being further reduced in future years. Until such time, Human urged taxpayers to avail of as many of the “tax breaks” as possible. The 2011/12 tax legislation allows for taxpayers to deduct payments into retirement annuities to the value of R1750 or R3500 less any contribution to a pension fund, or 15% of non retirement funding income. Pension fund contributions, up to 7.5% of gross remuneration, qualify for a tax deduction too. Savers should also note that transfers from provident or pension funds to preservation funds are tax free!
Retirement resolution three: Pay yourself first
There are numerous articles to address the “how much do I need to retire” question. Human says you will have to retire with “at least ten times your annual salary to achieve 80% of that salary adjusted for inflation”. This 80% replacement ratio (76% is held up by most experts as enough) is required to maintain living standards post retirement. In order to achieve this you will have to save 18% of your monthly salary from age 25 (assuming you invest in a typical balanced fund).
There is a simpler way to look at this equation. According to Human you should begin your retirement funding calculation by asking how many paydays remain until retirement. A male (aged 40) who plans to retire at age 60 has only 240 paydays left until retirement. It sounds like plenty of time, until we consider the following. Assuming this client reaches the average life expectancy of 75 years, he will have to provide for 180 pay days during retirement!
“This type of capital cannot be accumulated in a short period of time… It takes years of contributions and compound growth to reach this target – so begin early – and pay your self first,” she concludes.
Retirement resolution four: Preserve your benefits when you change jobs
The biggest mistake South African savers make is to withdraw the cash value of their retirement fund when they change jobs. “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,” pleads Human. “Satisfying a short term goal today could result in a significant shortfall in your funds at retirement!” As a rule you should always preserve your accumulated retirement capital in a sensible “retirement funding” vehicle. Your financial advisor should be able to assist you with transferring your existing pension or provident funds into a preservation fund, for example.
Retirement resolution five: Review your portfolio on a regular basis
It is one thing to know where you are going – but quite another to know where you are. Human points out that you cannot complete your retirement plan and then forget about it until the day you retire. “Retirement is a process that you work on throughout your life. Your plan needs to change with your changing circumstances – evolve as you move through the various stages of life – and take account of different risk appetites as you get closer to retirement age,” she says. You should therefore commit to reviewing your retirement plan on an annual basis (at least). Important “reviewing” steps include updating contact and beneficiary details and revisiting investment strategies and portfolio choices.
“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,” concludes Human. If you want to know whether your client is on track with his / her retirement savings objectives, then Human’s Retirement Planning Resolutions are an excellent place to begin.
Editor’s thoughts: Saving for retirement requires commitment and discipline. Given South Africa’s high personal income tax rates it makes sense to welcome any tax concessions with open arms. Do your self-employed clients avail of the tax breaks on offer for contributions to retirement annuities? Please add your comment below, or send it to [email protected]
