By Belinda Sullivan
The majority of working people do not retire with enough retirement savings, and with medical advances people are living longer, which makes saving more for your retirement even more crucial.
You can claim a tax deduction of up to 27.5% a year based on the greater of your remuneration for PAYE purposes or your taxable income (up to R350 000) for pension, provident and retirement annuity fund contributions. Taking advantage of this tax break is the savvy way to save.
By taking advantage of the tax benefits, our research shows that individuals can achieve between an additional 1.5% and 2.5% per annum in after-tax investment returns depending on their income levels.
Here’s how to do it:
1. Additional voluntary contributions
You’ve got the flexibility to decide how much extra to contribute, or it could be a lump sum whenever you have extra money. There are generally no administration fees charged for putting extra money into your fund, so the full amount is invested for your retirement.
2. Increase your contribution rate
Contributions to your fund are deducted from your salary before tax. If you contribute an extra five percent, your take-home pay will not decrease by five percent because you will pay less tax on the reduced, pre-tax income. More money is invested towards your retirement savings.
As a simple example, if your total monthly income is R25 000, and you contribute 15%, i.e. R3 750 – to your retirement, your taxable income is R21 250. However, if you increased your contribution to 27.5%, i.e. - R6 875 – your taxable income would be R18 125. Your fund may offer you the option to increase your contribution rate. Ask your HR department about your contribution rates.
3. Sign up for a new retirement annuity
Top up your retirement savings with a retirement annuity, which has a number of benefits including tax incentives, flexible contribution rates, and they are separate from employment-related savings. Most annuities have a minimum investment amount to get started. You may need to save up, or wait until you receive a bonus or if you receive money back from SARS when you submit your tax return.
4. Draw up a budget
If you think you don’t have any extra money to top up your retirement savings, drawing up a budget and see where you can save. Cancelling subscription services you aren’t using, or getting new quotes on your insurance can help you find a few extra hundred rand, which could be used in a Tax Free Savings Account.
It is important to check what options you have in your retirement fund. Speak to a financial adviser who can help you start small and increase your savings as you have more available cash. Leverage the power of compound interest over time to be a winner when you reach retirement age, and one of the few people in South Africa who can afford to retire comfortably.
Belinda Sullivan, head of corporate consulting strategy at Alex Forbes