By Rob Rainier, Eastern Cape provincial executive: Individual Consulting at Alexander Forbes Financial Planning Consultants.
Everything in your life reflects a choice you have made. If you want a different result, make a different choice.
When it comes to people facing the reality of retirement, I have often heard the comments:
- “If only I had contributed more to my retirement savings.”
- “I shouldn’t have cashed out of my fund when I left my previous employer.”
- “I should have kept going with that savings plan my parents started for me.”
Understandably, life happens and you only feel the impact of these decisions later in life, especially when you realise you are about to retire and will still need an income for another 20 plus years.
Unfortunately access to retirement savings is relatively easy, as cashing out is one of the options you have when leaving a company. (Preserving your benefits with your previous employer or in a preservation fund or transferring to your new employer, are the other far wiser choices). With the average tenure at an employer being just under seven years, choosing to cash out every time you left an employer, means that have lost out on that magical formula of compound interest. This in turn means you have to save far more each month as you have less time to do so leading up to retirement.
In today’s uncertain and ever changing environment, we often overlook planning for the future for living today, believing that tomorrow will sort itself out. We use easily accessible savings to settle debts and pay for items we want but don’t need.
Investing in a retirement annuity fund will help you future-proof your retirement as follows:
- The purpose of a retirement annuity is to provide you with money to buy a pension, called an annuity, at or during your retirement years. That being said, you may withdraw a sum of money tax free up to certain limits when the policy matures.
- You may withdraw up to one-third of your money from the age of 55 (hopefully we are all wiser and have a good relationship with money at this point).
- You can contribute every month or invest a sum of money to top up contributions when you leave your employer or at any other time.
- Investment portfolios consist of local and international shares, property, bonds and cash, depending on your investment risk profile.
- You don’t pay any tax within the investment, which means no capital gains or dividend withholding tax.
- Should you pass away before the policy matures, there will be no estate duty. Financially dependent heirs will receive a share of your accumulated retirement savings.
- You don’t pay any lump sum tax when buying income at retirement.
- You can claim a tax deduction of up to 27.5% a year of your taxable earnings (up to R350 000) for any extra money you contribute.
Tip: Contributing a sum of money into a retirement annuity just before the end of the tax year in February will lower the tax you have to pay for the current tax year.
If you are already an investor and have seen the benefits of investing through retirement annuities, share your insights with friends, family or colleagues. Encourage them to make the right choice by investing, even in a small way, into a retirement annuity, so that they too can reflect one day on having made the right choice!
As always, I encourage you to engage with your personal financial adviser to structure your investment correctly.