It’s vital to stay invested
One way to ‘prolong the good life’ is to use tax incentives to manage retirement investments, writes
As market volatility wreaks havoc on investment portfolios and rising inflation erodes real returns, those investing for retirement should keep calm and stay invested.
“The old saying that it is not about timing the market, but rather time in the market holds true, especially in uncertain markets,” says Wehmeyer Ferreira, executive director at 1nvest.
“Investors are rewarded in the long term for taking on risk by remaining invested. The key is to allocate capital in the most efficient way to match your goal or objective.”
In increasingly complex markets, Ferreira says investors should have a clear and well-articulated plan, and it is vital that they stick to this plan in tough markets.
“Another element investors can control to positively influence their investment outcome relates to the costs they pay,” continues Ferreira.
“The compounding effect of costs can erode investment returns, especially over long periods. Index-tracking products are a great tool to reduce overall costs, and investors are increasingly
using these funds as ‘core’ in a core-satellite investing model.”
The rising cost of living or unexpected expenses can also hamper an investor’s ability to achieve investment objectives by constraining the ability to continue making regular contributions to investments.
“Saving for retirement without interruption can prove difficult. When shortterm emergencies occur, it is important to make every effort to stay invested,” recommends Lizl Budhram, head of advice at Old Mutual.
Avoiding drawdowns, reinvesting a pension or provident fund instead of cashing them in if you leave a job, and continuing to invest according to your plan, remain vital strategies to a comfortable retirement, especially as more people are living into their 90s thanks to advances in medical science.
If an investor’s finances come under pressure due to unforeseen circumstances or the gloomy local economic climate, Budhram recommends speaking to a financial adviser about potential options.
“Accredited financial advisers can play a key role in helping you strengthen your financial future by creating a personalised plan that meets your specific needs, identifying potential gaps in your financial plan, and will help you implement the plan and track your progress with regular reviews.”
Importantly, financial advisers can provide responsible advice to manage your retirement investments in the most tax-efficient manner through related tax incentives, which were introduced to encourage people to save towards retirement, and offer several benefits.
“If you are not a member of a company pension or provident fund, a retirement annuity (RA) is a good taxefficient option that allows you to choose your investment funds within limits set out by the retirement fund regulator,” says Budhram.
“By saving towards retirement in an RA, you can increase the absolute amount of your pension pot by topping up your RA,” says Natalie Kiewitt, executive: operations at PPS.
“One of the biggest advantages of topping up your RA is boosting your retirement savings over the long term, which allows the power of compound interest to take full effect over time.”
When saving for retirement with an RA, investors can claim back up to 27.5% of their remuneration or taxable income of up to R350,000 in a tax year. The tax deduction limit applies to the cumulative annual retirement contributions, whether investors saved in a retirement annuity fund, a pension fund or a provident fund.
“You can further boost your retirement savings by reinvesting the tax rebate received from Sars when you include your RA contributions in your tax return,” says Kiewitt.
And investors can carry the tax benefit forward to reduce tax liability in future tax years if they exceed the 27.5% maximum contribution limit.
“Ultimately, the more you top up your RA contribution for the tax year, the higher the tax benefit,” says Kiewitt.
In addition to the taxdeductible premiums, RAs are exempt from tax on dividends and interest, and no capital gains tax is payable on growth earned on the investment.
“Investors should leverage a tax-free investment account to boost their tax benefits and bolster their retirement savings with a maximum lifetime contribution of R500,000, as individuals do not pay income tax, dividends tax or capital gains tax on returns from these investments,” adds Kiewitt.
“Retirement planning is an absolute necessity. It’s how you prolong the good life. If you have succeeded in creating a happy and secure lifestyle for yourself and your family, it makes complete sense to take steps to extend that lifestyle beyond your working years,” says
Budhram.
Financial advisers can play a key role