“The most common mistake entrepreneurs make is confusing revenue with income,” says Ray Mhere, Johannesburg regional manager of Allan Gray. “Another mistake they make is not paying themselves a regular salary, which can negatively impact their long-term ability to invest.”
Because of this, many entrepreneurs and self-employed professionals delay saving for their retirement. “Young millennials are optimistic,” he says. “They believe they’re going to create their own businesses and make lots of money, and they don’t need to worry about their retirement now.”
But waiting too long can have disastrous consequences. “Rather set aside a smaller portion of your salary in your 20s and 30s for your retirement savings than being forced to save 40 percent or 50 percent of your income in your 50s,” he says.
Which products can you choose from?
If you’re self-employed, two good options for saving for your retirement are retirement annuities (RAs) and tax-free investments, says Mhere. “Both have their own benefits and drawbacks, so it’s worthwhile considering these before you commit your hard-earned money to either investment option.
“RAs are fantastic, because they are stand-alone products. You don’t have to be employed to open a RA.”
The main advantage of RAs is the tax benefits: “Contributions to your RA can reduce your taxable income (subject to the annual limits),” he says, adding that any excess contributions can be used towards a tax deduction in future.
“In addition, you don’t pay any tax on the dividends, the interest and the capital gains accrued within the fund itself. And when you reach the age of 55, you’re allowed to take a third of your money in cash and a portion of that (R500 000) is also tax-free.”
But there are drawbacks.
“It’s a restricted product, so you cannot access the money before you turn 55, except in limited circumstances. There are also regulations that limit your exposure to risky assets, such as equity, offshore investments or property.”
If an RA sounds too restrictive, there are other savings products, such as tax-free investments.
“Tax-free investments allow you to contribute a maximum of R33 000 a year or R500 000 in your entire lifetime,” says Mhere. “The difference is that, with an RA, you can’t touch the money until you’re 55, whereas with a tax-free investment, you can access it. But this should be a warning to some, because if you can access it, who’s going to save you from yourself?”
Mhere says that amounts withdrawn from a tax-free investment cannot be replaced; your lifetime limit remains the same.
There are other benefits, such as not paying tax on capital gains, dividends or interest. However, the downside, Mhere says, is that R33 000 a year may not be enough for retirement savings, and if you exceed the investment limits, you’ll be taxed at a steep 40 percent. He emphasises that the lifetime limits are applied across providers.
Of course, there’s no reason you can’t invest in both products, “I believe the best way to take advantage of a tax-free investment would be to use it as a product to supplement your retirement savings,” he says.