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If you don’t own a retirement annuity (RA), should you be taking one out? If you do, should you be topping it up?
You can ask yourself these questions at any time, but as February is the last month of the tax year, deciding to make contributions before the end of this month could save you tax for the current tax year.
Saving into any retirement fund can give you a tax deduction up to certain limits that most South Africans are nowhere near reaching.
Besides the tax incentives, saving in an RA can help ensure you have enough money to retire on - more than 70% of South Africans worry that they will not have enough, according to recent Retirement Reality survey by 10X Investments.
But the same survey identified why many South Africans aren’t saving for retirement – they can’t afford to.
Many of us are facing tough times, Craig Gradidge, an independent financial planner and founder of Gradidge Mahura Investments, says. Administered prices, like electricity and water, have gone up by a lot more than inflation, loadshedding incurs additional costs, interest rates have been rising and we are paying the cost of state capture, he says.
However, we should be making saving and spending decisions with a budget, he says. Many people do not run their financial affairs with a budget, which remains the foundation of good money management, he says.
"Its simplicity overshadows its power and impact," he says adding that the absence of a budget is often why people don’t stick to a long-term investment strategy and dip into their savings.
Investing in your future
Wouter Fourie, an independent financial planner and director of Ascor, says you cannot afford not to save for retirement - it is your own future you are investing in.
He agrees a budget is the key as it can help you pay yourself first from the day you start working – even though it can be difficult to cover your basic needs when you start out.
You may think you don’t need to provide for your retirement because you won’t stop working, but you are in a country with massive unemployment and older employees are often pushed to retire early, he adds.
Illness can also prevent you working in your later years and without savings to fund your future income, you may end up relying on the social old age grant – around R2 000 a month.
No brainer for the self-employed
If you are self-employed and paying tax, an RA is a no-brainer, Fourie and Gradidge agree.
Contributing to an RA provides the discipline of saving regularly and provides a massive tax benefit, Fourie says.
Gradidge says an RA protects your savings from creditors. Being self-employed is really tough and many businesses fail over time, he warns.
Having an RA is important for those who run lifestyle businesses, which cannot be sold without the ongoing involvement of the founder, he says. These business owners need to diversify their personal balance sheets away from their businesses and build up a portfolio of products, including retirement annuities, he says.
Fourie agrees many business owners, like medical doctors, battle to realise the value of the business when they retire because they are the key person or because the business has not adapted to changes.
Good for employees too
If you are contributing to an employer-sponsored retirement fund, you need to check whether you are saving enough to provide the income you need and that you are also maximising the tax incentives to do so.
Remember too, that if you have ever withdrawn savings from your fund or if you started saving after the age of 25, you are probably not on track to save enough to retire comfortably.
If you are not contributing as much as you can for the maximum tax deduction, consider increasing your contributions, Fourie says.
If your employer-sponsored fund accepts additional voluntary contributions, paying more into that fund is likely to be cheaper than an individual RA, Fourie says.
However, the advantage of supplementing your employer-sponsored retirement fund with an RA is that it provides diversification in your investments, he says.
Gradidge says having an RA in addition to a company-sponsored retirement fund means you will have more flexibility in structuring your affairs at retirement as you can retire from different funds at different times.
You will be in a better position to transition from full-time employment, to part-time employment, to full retirement, he says. The savings in an RA can supplement your income while you are working part-time while preserving your main retirement pot until you retire fully, he says.
This article was first published on SmartAboutMoney.co.za, an initiative by the Association for Savings and Investment South Africa (ASISA).
