An immense number of South Africans will never be able to retire financially free and some will never retire. With a measly Sassa Government Pension of R1 860 before the age of 75 and R1 880 thereafter, you would ask yourself, what can you actually do with that money?
The Government knows that this is an issue and they also don’t want to provide for millions of people in their retirement, it simply can not be sustainable. The government has gone as far as to give you tax deductions on the contributions you make on Retirement products through the year, effectively reducing your personal tax burden.
You can contribute up to 27.5% of your annual taxable income to Retirement products, or a maximum of R350 000. This can be in the form of monthly contributions or ad-hoc capital contributions.
So when do you start saving for retirement? The short answer is, as soon as possible. The moment that you start working after School or University, you should be saving in a retirement product, even if you start out with the minimum amount.
As you start approaching retirement, you should ideally be getting closer to being debt-free. This will open up cash flow and you should start to contribute even more towards retirement. Every household has their own living standard, this should also give you an indication of what you will need after retirement to uphold your lifestyle.
When you reach the age of retirement of 55, as set out by The Pensions Fund Act, you may convert your retirement capital into an annuity that will pay an income to you. Before you decide what to do with the capital, you can either invest the full amount or you can take 1/3 in cash as a lump sum and the 2/3 of the capital that’s left will be invested.
You have a R500 000 tax-free lifetime limit on this 1/3 lump-sum and the rest will be taxed according to the Retirement Lump Sum Withdrawal(retirement) table as below.
There are two options when deciding on an annuity:
- Living Annuity: The capital is exposed to financial markets, this means that the capital may grow or fall. You may withdraw an income of between 2.5% and 17.5%. Income can be paid Monthly, Quarterly or Yearly and will be taxed according to the Personal Income Tax table. If the investor dies, the capital will be paid to a beneficiary.
- Life/Traditional Annuity: The capital is not exposed to the markets and you have no choice of income. You buy an income from the Investment Administrator or Insurance company. The higher the capital, the higher the income. You may choose by how much your income increases and if you want the income to be paid to a beneficiary, these benefits will take more capital and pay you less income.
You can also blend the above two options.
Planning is essential around personal finances. Speak to a financial professional to make sure that you are contributing enough and that you are getting the most out of financial markets over the long-term.
Ruvan J Grobler