Prepare for a successful retirement

New Year’s Resolution: Prepare for a successful retirement

You might have heard the statistics on the current retirement landscape in South Africa, where only 6% are properly prepared for retirement. This is due to the fact that people are living longer, healthier lives, and are therefore living longer in retirement.

The question then becomes how does one properly prepare for retirement and you may start asking yourself if you are properly prepared for retirement. The key to having a successful retirement is to start saving as early as possible to ensure that you have enough money at retirement. You would also need to be conservative with your income in retirement to ensure that your fund value is not depleted and therefore can sustain your annuity income for longer.

Retirement products: What you need to know

The concept of retirement has certainly evolved over the last few decades. Thanks to extended life expectancy and a changing idea of what being “old” entails, most people don’t see themselves quietly sitting on a park bench and feeding birds during retirement.

Instead, modern retirement is increasingly seen as an opportunity to explore, start new ventures, become actively involved in your passions and, quite possibly continue making good money while doing so.

But despite this, it is still necessary to save for an income when you’re not working full-time.

Warren Ingram, the director at Galileo Capital, sums up the intention of retirement saving in a modern world: “The goal is to obtain financial freedom as quickly as you possibly can. Nowadays, achieving this goal means being able to work on things you really love, doing the things you want to do…”

The easiest way of saving for retirement is through vehicles expressly designed for this purpose. The three most common investment vehicles are pension funds, provident funds and retirement annuities.

The most important aim of these savings vehicles is to encourage and enforce regular contributions towards a retirement income that will be accessed at retirement age. (It’s important to note that any lump sums paid out via pensions funds, provident funds and retirement annuities are taxable)

Retirement annuities

Firstly, anyone can buy a retirement annuity. You may be employed by a company, or self-employed. There are a number of factors that make retirement annuities appealing for those who want to save for retirement:

  •  According to Ingram, the tax benefits you receive with retirement annuities are enormous. While you can currently claim a tax deduction of 15% of non-retirement funding taxable income, this limit has been raised to 27.5% with effect 01 March 2017.
  • The flexibility inherent in retirement annuities has been one of the drivers of their popularity in recent years. You can change your contribution amounts over time, while pension or provident fund contributions are often based on a fixed percentage.
  • With most retirement annuities, you are able to choose the underlying asset classes that your money is invested in.
  • Retirement annuities are also very effective estate planning tools. The proceeds are exempt from estate duty, capital gains tax and executor fees because the cash amount can be paid directly to beneficiaries if they exercise this option. However, the laws here are complex and you should seek professional advice first before using a retirement annuity for estate planning.
  • Retirement annuities are also protected from creditors. (This does not apply to tax owed to the South African Revenue Service, maintenance claims and Section 37D claims like divorce.)

Below, please find an easy to understand table identifying the various Retirement Saving Vehicles. I think that you might find it helpful.

Please feel free to contact us should you wish to review your current Retirement provisions.