According to Lourens Coetzee of Marriott Asset Management, maintaining your lifestyle in later years should be the core objective of your investment plan. However, to achieve this objective, you are often required to adjust your lifestyle today so that you are not forced to do so in the future.
Employees generally contribute to compulsory pension or provident funds through their employers. More often than not employees know only their market value and have no idea how much income their savings will give them when they retire. According to Coetzee, it is critical to know what income will be generated from your accumulated savings when you are no longer working.
“Further to this, income must be converted into a present day equivalent, as the purchasing power of income is affected by inflation over time. By considering the future level of income in today’s terms, you can gauge whether it will be sufficient to sustain your desired lifestyle,” he said. “Should this not be the case, you will need to make additional voluntary contributions into either a retirement annuity or discretionary product such as a unit trust.”
Coetzee says that one of the most tax efficient means of saving outside of an employer pension fund is through a retirement annuity. Not only is the income earned exempt from all forms of tax, but the contributions made are tax deductible, subject to certain limits. “While the income earned from these savings is fully taxable when being drawn in latter years, the benefits of tax-free capital accumulation from the re-investment of income, coupled with a likely lower marginal tax rate on retirement, makes this a highly tax efficient savings vehicle,” he said.
Contributions to a retirement annuity are flexible, and it is therefore possible to contribute monthly or to invest an annual lump sum before the tax year end in February. Consequently, it is well suited to self-employed individuals or commission earners who do not belong to a company pension or provident fund or have a variable monthly income.