Encourage savings
● Whether you have one employee or many, encouraging your employees to save for an emergency and for long-term goals will improve their financial wellbeing.
You can help them set a savings plan into which you can channel savings as a deduction from earnings and/or to which you contribute, or incentivise the preservation of savings.
Emergency savings can help your employee avoid having to borrow from a registered lender or an unregistered loan shark, incurring high interest charges.
Long-term goals may include buying an asset, such as a house, or saving for a child’s education or retirement.
Bank savings accounts can be used initially until enough has been saved to meet minimum investment amounts for a longer-term savings product such as a unit trust fund or exchange traded fund (ETF).
Unit trust investments can be stopped or started at any time, although those with exposure to equity markets are more suitable for longer investment periods of three or more years — long enough to smooth out the market’s ups and downs. The disadvantage of this type of investment is that an undisciplined investor can raid this money at any time.
If your employee is likely to save enough to exceed the tax-free interest exemption (R23,500 if you are below age 65) or when cashing in will exceed the annual capital gains tax exemption of R40,000 a year, you could recommend a tax-free savings account with an underlying unit trust or ETF.
Retirement savings have one benefit over tax-free savings and that is that the contributions made to a retirement fund are tax deductible.
But tax deductions are no use to those paying no tax because they earn below the tax threshold.
You can take out a retirement annuity (RA) for a taxpaying employee to which you can both contribute and, as the owner of a small business, you can purchase a group retirement annuity. If the employee leaves your employ, they can take over the RA and continue contributing or leave it to mature.
Savings in an RA are also not accessible until age 55. Even if, for example, the employee lost their job at the age of 50 and had a tidy sum in the annuity, the money would not be available.
Watch the charges, especially on small amounts, and beware of any policy that has a penalty for amending the contract.