am 30 years old and work as a contract worker, which means my salary is not fixed and ranges from zero in some months to R8 000 a month. I currently contribute R750 a month towards my retirement annuity and also contribute R500 a month to a tax-free savings account. I want to increase my savings by R500 a month from next year, but I don’t know if I should increase my retirement annuity or my tax-free contribution, or look for another financial product.
Boitumelo Mothoagae, head of customer relationship management at Liberty, replies:
It is excellent that you are already saving and would like to increase your savings contribution. This means you are one of the 25% of people in your age group who are saving for retirement.
Before making a decision to increase your savings, however, you need to look at your overall financial situation.
You indicated that your income is not fixed. Because it is not fixed, you need to ensure that whatever financial needs you pay for each month are covered. Unless you have an emergency fund, this will make it very difficult for you to maintain a savings plan or manage your finances well. For example, during the month when you earn no money, you may be unable to pay for any of your living needs as well as your savings. This means that the following month you may have to pay double – for the previous month that you missed and the current month.
If, in the following month, your income is not enough, you may again miss these payments, making it very difficult to pay triple the amount required to bring your payments up to date. An emergency fund that is the equivalent of at least three months (preferably six to 12 months) of salary would help you during your months of low income, as you would still be able to pay for all your financial requirements.
You must firstly draw up a budget to determine what your average income is in a 12-month period and what your expenses are in that period. Your income should then be split as follows:
50% for your financial needs (such as rent/mortgage, food, transport, etc).
15%-30% for your savings (such as retirement planning, emergency fund, risk cover, etc).
The rest can be used for any other financial requirements you may have (such as entertainment).
Try to ensure that all your expenses are covered by your average income and do not require that you use your maximum income (R8 000).
Once you have your budget set up, go and see a financial adviser, who will look at your overall financial situation. Based on your input, they will determine what your financial requirements are and help you come up with a financial plan suited to your financial needs.
For example, you are already contributing 10% of your maximum income to retirement, and, in total, your savings contribution per month is 16% of your maximum income of R8 000, so it might not be necessary to increase your retirement contribution, as this percentage may be higher for your average income. In addition, because your income is variable, you may want to put your extra savings into a vehicle where the money would be available at short notice, and a retirement annuity will only be available for access at age 55 if you are healthy.
Your adviser will be able to tell you which savings vehicle is best suited to you. For example, because your income is not that high, an endowment (which gets taxed at 30% during investment) may not be the best vehicle for you, as the tax rate on it is higher than your marginal tax rate.
As you indicated above, you have the new tax-free savings plan, where there is a maximum contribution amount (R30 000 annually) that will remain nontaxable. Your current total annual contribution to this is R6 000, so you may add the increase to this savings plan without breaching the R30 000 annual cap. However, discuss this with your financial adviser to determine that this is your best option. There are various benefits to the tax-free savings vehicle:
No capital gains tax on a switch within this account or on withdrawal.
No tax on dividends – your account will earn the gross dividend, which will be reinvested.
No tax on income – all interest and other income will be reinvested tax-free.
No performance fees or initial fees. However, advisers will be able to charge an initial adviser fee, agreed with the client.
No additional fees will be charged except the annual service fee of the fund selected. This may include a trail fee to the adviser.
Even though the amount that can be contributed has a lifetime limit of R500 000, there are no limits on how big this account can get. Therefore, if invested in high-performing portfolios, the investment may grow to more than this.
Easy access to funds because there is no lock-in period. Consult a financial adviser who will do a full financial needs analysis for you to set up a financial plan that will determine whether you need to increase your savings right now, and, if so, which area requires the biggest increase. The adviser will also be able to determine the best savings vehicle and the tax implications specific to you.