PREPARE WISELY FOR YOUR RETIREMENT

THERE are many ways to save for retirement like investing in property, hoping that rental income will provide an income stream in retirement as well as capital growth to provide a legacy for beneficiaries.

Others play the stock market, or even use the good old stash under the mattress approach. All of these methods could result in a nest egg for retirement, but the efficiency of a retirement annuity should not be underestimated.

A retirement annuity provides so much more than just a pension for your retirement years.

Retirement annuities remain a popular investment vehicle with many South Africans for good reason.

Tax benefits are just one of the reasons that you should consider a retirement annuity!

Many self-employed businessmen and informal businesses do not have access to pension and provident funds due to the size of their companies and the costs of setting up such funds. This leaves them in a situation where they have to seek other means of making provisions for their retirement.

A Retirement Annuity (RA) helps you to build up capital during your working years so that you have enough income to enjoy the same standard of living when you retire.

The rule of thumb is that if you save 15% of your salary over 35 years, you will receive 75% of your salary as a pension, given reasonable returns.

The problem is that your pensionable salary (the amount that your 15% pension contributions are calculated on) is usually about only 70% of your total salary benefits which include, for example, a bonus, car allowance, medical aid and other benefits. This means that you could retire on 75% of 70% of your salary!

It is important to save for these ‘extras’ as they do help us meet our current living expenses.

For example: if your monthly package is R20 000, you would need to retire on the equivalent of R15 000 (75%). But your pensionable salary is significantly less at R10 500 (75% x R20 000 x 70%).

By investing 15% of your non-pensionable income into a retirement annuity, you can make up the savings gap. A starting point is to always invest 15% of your bonus tax-free into an RA.

You can invest up to 15% of your total income (less any amount that may be used for other pension fund contributions) tax-free.

Not only can you invest with before-tax money, but you do not have to pay capital gains tax or income tax on your retirement investment. Your investment growth will be higher over the long-term as the growth remains in the policy and will usually offer you a better after-tax return than other types of saving.

When you retire, you can take one-third of your investment as a lump sum. Of this the first R315 000 is tax-free with a favourable tax-rate for higher amounts.

The remaining two thirds of the retirement annuity is invested in an annuity to provide you with income during your retirement.

They say compound interest is the eighth wonder of the world. Because you are saving over a long period, your money starts to work for you as you earn interest on the interest.

If you save consistently over 30 years, less than 35 cents of each rand of income you receive will come from the contribution you paid in.

The balance will come from the growth earned on your contributions and savings in retirement.

You do not have access to your retirement annuity savings until the age of 55.

This may sound like a disadvantage but it removes the temptation to dip into or deplete your savings while you are working.

A 25-year-old needs about 15% of his/her salary through their working lifetime to secure an adequate pension. If they cashed in their savings at 35, they would need to save 25% to get to the same benefit.

Starting from a zero base at 45 requires an incredible 47%!

The only remedy here would be to retire later.

As markets fluctuate during different economic cycles, your consistent contributions will average out this variability. You also draw your pension over a (hopefully) prolonged period.

Therefore, what happens in a turbulent investment market is of less concern to you.

The average investment manager has delivered returns which are 10% above inflation over the last five years, despite the recent global economic crisis.

If your dependents are left to cope without you, your retirement annuity can provide a source of income for those you leave behind, especially if you buy death cover on your policy.

The cash benefit from a retirement annuity falls outside your estate, so if you die and are insolvent, your benefit is paid to your family rather than your creditors.

Part Two of this feature on Preparing For Retirement will appear next week.