How to Retire with Financial Security

While money can’t buy happiness, it certainly can help you live a comfortable retirement. We look at retirement annuities as a tax efficient way to save for your golden years.

Evelyn Doubell CFP®

Evelyn Doubell CFP®

Private Wealth Manager

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How to Retire with Financial Security

The retirement prospects for South Africans are bleak. According to research undertaken by Brand Atlas and 10X Investments in 2019, two-thirds of respondents have no retirement plan or just a hazy idea of one. Nearly half don’t actively save for retirement at all. You might even know someone who is retired but can’t support themselves despite having worked their whole life. This is a scary situation, not least because government coffers are not exactly in a position to provide much support.

When should I start saving for retirement?

Now! If you don’t want to be another statistic, you can start working towards your retirement now, no matter your age. The earlier you start the better, so that you can take advantage of the effect of compound growth (when you earn interest on interest).

There are many ways to save for retirement; a good place to begin is with those products that offer tax benefits, such as a retirement annuity (RA).

Are contributions tax deductible?

Yes they are. The following limits apply though:

  • Provident, pension and RA contributions are deductible up to the greater of 27.5% or R350 000
  • Any excess payments may be carried over and deducted over the next tax year (or years depending on the amount)
  • Excess payments can be withdrawn tax-free when you retire or withdraw from the RA

Let’s take the following example. If you earn R500,000 per year and you do not contribute to retirement savings, your annual tax will amount to R113,655.  If you contribute 15% of your income to a retirement annuity (R75,000 per year or R6,250 per month), your tax payable will drop to R86,665 because your income is effectively reduced by the amount you pay into the RA.  The difference is a R27 000 tax refund from the taxman, a tidy sum to form part of your retirement nest egg. 

Do I have to pay tax on my RA growth?

You won’t be taxed on any growth within your RA so you’ll not be liable for dividends, interest or capitals gains tax. Depending on your tax rate, this could be a saving of between 18-45%, which can make a huge difference when compounded over time. 

Furthermore, RA savings are protected from creditors and on death, RA proceeds are exempt from estate duty and executor fees.

Do I have lots of choice when it comes to investing?

You can select from over 1,000 unit trusts to create a portfolio that suits your needs, which can be adapted as your situation changes over time at little to no cost.  For example, you can change your contributions or make lump sum additions at any time. If your finances take a hit and you’re unable to contribute for a few months, you can pause your contributions and resume when you can afford to, without any penalties.

What about the fine print?

There are a number of restrictions to be aware of:

  • You can’t touch your RA before you’re 55 years old
  • You can withdraw up to one-third upon retirement but the rest has to go into a product that will provide you with income for the rest of your life (such as a living or guaranteed annuity). Up to R500 000 of the one-third is tax-free.
  • You may access the capital before age 55 if you become disabled, retire due to ill-health or officially emigrate from South Africa.
  • You can also access all the cash if the value of your RA is less than R247 000 when you reach 55 years of age.

It’s never too early to start thinking about how you want to live out your golden years. Unfortunately, it’s not something people pay much attention to before it’s too late. Speak to one of our Private Wealth managers to make sure you’re doing all you can today to enjoy a comfortable retirement tomorrow.

Interested in maximizing your tax-free benefits, you may want to consider a Tax-Free Savings (TSFA) account. Learn more about Tax-Free Savings Accounts.

#Knowledgeintowealth #Retirementplanning 

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