Consistent saving and tax benefits make retirement annuities appealing
By Jaco Prinsloo
Everyone needs to save for retirement. Even if you plan to keep on working past normal retirement age, there will come a day when you are mentally or physically unable to. When that day comes, you need retirement savings to replace your lost income. A retirement annuity is one investment vehicle which will help you prepare you for that day.
You can think of a retirement annuity like a special savings pot for retirement. You add to the pot while working, by making monthly or annual contributions and start withdrawing an income in the form of an annuity when you stop working. Because the investment is especially for your retirement, a retirement annuity is a long-term investment where you can only access the funds after the age of 55 – even if you stop contributing earlier.
Besides saving for retirement, other benefits of a retirement annuity include:
All contributions up to R350 000 or 27.5% of your taxable income are deductible against your income tax. This allows you to reduce the amount of tax you pay annually.
Your money is invested in a mix of assets like cash, bonds and shares to help it grow. And the good news is that the growth is tax-free - meaning you don't pay any income, dividends or capital gains tax while you are saving for retirement. Fewer taxes means better growth and therefore more money for you.
Retirement annuity funds are subject to Regulation 28. Regulation 28 provides guidelines on how much and where you can invest. The guidelines ensure you stay well diversified - protecting your retirement savings.
All your retirement annuity savings are protected from creditors and are paid directly to your nominated beneficiaries on your death. This saves on potential estate duty and executor fees.
To be able to replace 75% of your income after retirement, you need to save about 17% of your salary for 35 years. Business owners, entrepreneurs and salaried workers regularly make use of retirement annuities to save for retirement. Even if you are contributing to a pension or provident fund through your employer, you can still make additional contributions to a retirement annuity to boost your retirement savings, up to the contribution limit. If you are near or in retirement, you can still benefit from the tax benefits today and compounding growth over the coming years. Consequently, a retirement annuity is available to everyone, at all life stages.
The best time to start saving is when you start your first job. The second best time is now. By following these easy steps, you can start saving for your retirement with as little as R500 per month:
Step 1: Speak to a qualified financial adviser to determine how much you need to save, how much you can afford to save and what type of investment portfolio suits you.
Step 2: With the assistance of your financial adviser, complete and submit the necessary forms and FICA requirements.
Step 3: Make a lump sum contribution or wait for your first debit order to be deducted.
The affordability, simplicity and tax benefits make a retirement annuity one of the best ways to ensure your financial well-being in retirement.
Jaco Prinsloo is a Certified Financial Planner at Alexander Forbes