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Financial Services

Retirement Policies

No one wants to work forever
Most of us would, at some point, like to put our feet up, relax and start indulging in some of the other more enjoyable aspects life has to offer – even if it is just sitting in front of the TV.

It seems simple enough, but in order to successfully invest in your retirement you first need to ask yourself a few questions:

When do you plan to retire?
Although most people would like to retire early, you should consider that:

  • The earlier you retire, the longer you’ll need to fund your retirement.
  • Early retirement means the time you have in which to save is diminished (and so is the ability to generate growth on your savings).
  • Large scale retrenchments have resulted in many South Africans retiring early.

How much income will you need on retirement?
This depends on the needs different individuals have, but generally speaking:

  • As a rule of thumb, you’ll need approximately 70% of your retirement income.
  • Whilst some costs may no longer apply (commuting to work, work clothes, school fees) others may increase – such as medical aid, which is no longer subsidized but increasingly important as you get  
    older.
  • You should aim to be free of debt, so that it doesn’t eat into your hard earned capital.

Many people assume that by simply contributing to a retirement scheme, their nest egg will one day automatically hatch and take flight. However the truth is, the contributions being made may not be enough to accumulate sufficient wealth with which to retire what is known as a retirement savings gap.

Bridging the savings gap: As hard as you work, your money needs to work harder. If, like most people, you find that contributing to the retirement fund where you work might not be enough, there are ways to grow your capital before you retire: Make additional contributions and invest in a retirement annuity.

If you’re looking to boost your retirement capital, you may want to consider an option like a Retirement Annuity suitable for those who are self-employed as well. The underlying investments in the Retirement Annuity are unit trusts and costs are kept to a minimum. A retirement annuity (RA) allows you to grow your retirement savings in a tax efficient manner. RA contributions are tax deductible within certain limits.

Beat inflation: You need to seek an investment fund which targets returns well in excess of inflation over the long-term. These are balanced funds, which invest in a spread of assets equities,bonds, property and cash ideal for investors who do not actively want to manage their own allocation of assets.

Preserve your current savings and invest in a preservation fund: It’s important to look after your current retirement capital, without dipping into your savings for expenses before you retire. This allows you to transfer your benefit should you resign, and helps you stay on track for retirement in the event of retrenchment, dismissal, or the winding up of your employer’s retirement fund.

Tax efficient investments : Retirement annuities provide a tax efficient way to build your retirement nest egg. Retirement annuity contributions are tax deductible within certain limits. Many employees’ remuneration includes non-retirement funding income. For instance commission, bonuses and rental income from an apartment may constitute non-retirement funding income. Essentially your non-retirement funding income is that portion of your income which is not used to fund contributions to your employer retirement fund.

If you invest in a RA the maximum allowable deduction from your taxable income is the greater of:
a) 15% of non-retirement funding taxable income, or
b) R3500 less deductible pension fund contributions or,
c) R1750.

If you don’t earn any non-retirement funding income then your deduction may be limited to the greater of b) and c). Also remember that b) would only be applicable to employees who belong to a pension fund and not a provident fund. If you are self-employed (i.e. you earn non-retirement funding income) then your deduction may be limited to the greater of a) or c).

“If you would be wealthy, think of saving as well as getting.”

- Ben Franklin

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