Retirement funds are still best option

One of the main ways government encourages people to save for retirement is to offer tax deductions on saving in an approved retirement fund.

While this can be helpful when you’re contributing to a retirement savings fund, the benefits you eventually receive when you stop working are still taxed.

This has led people to question whether that really is better than making their own retirement savings arrangements with after-tax earnings.

Old Mutual Corporate Consultants conducted a thorough investigation into how tax impacts retirement outcomes.

It compared the impact of a retirement fund, discretionary savings using after-tax income and a tax-free savings account (TFSA).

Scenario 1: Discretionary savings only (Discretionary)

Scenario 2: Discretionary savings including saving in a TFSA (Discretionary TFSA)

Scenario 3: Saving in an approved retirement vehicle (Retirement)

Scenario 4: Saving in an approved retirement vehicle and reinvesting tax savings on a discretionary basis (Retirement Plus)

Scenario 5: Saving in an approved retirement fund as well as reinvesting tax savings in a TFSA and a fully taxed, discretionary vehicle (Retirement Plus TFSA)

The analysis also considered different levels of income: R20 000, R60 000 and R120 000. People who earn higher salaries pay more tax.

The impact of tax before and after retirement was modelled to compare the impact over a lifetime. This assumed the tax regime remained the same, adjusting limits and caps by inflation where appropriate.

The analysis shows the retirement scenario 3 had the best outcome before and during retirement. Based on the same level of take-home pay before retirement, scenario 3 provides an after-tax pension that’s just over double the income under scenario 1.

That scenario (1) provides the worst retirement outcome across all three income levels. This is because the additional tax being paid on your salary due to not benefitting from retirement contribution tax deductions leaves relatively little money over to make a substantial post-tax contribution to discretionary retirement savings. The difference was more evident at higher income levels.

A suitable and diligent longterm savings plan can deliver a sound retirement outcome.

Andrew Davison is head of advice at Old Mutual Corporate Consultants.