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Retirement Guide: Part 5

Nov 23 2016 11:55
Jeanette Marais

Jeanette Marais, director of distribution and client service at Allan Gray.

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Person X already contributes to a company pension or provident fund. Should they also get a retirement annuity (RA), or would it be better to look at other investment products?

Your decision will depend on how much you are currently saving with your company scheme. Making full use of your 27.5% tax deduction allowance will help you in the long run, so it may be advisable to supplement your pension or provident fund with a retirement annuity. An RA is different from a company scheme in that you are the ultimate owner and it stays with you as you progress through your career with different jobs.

You may want to consider using other products, like tax-free investments (TFI) and basic unit trusts. With TFI products you use after-tax money to invest, but you pay no tax later; your withdrawals are completely tax free. The catch being that you may only invest R500?000 over your lifetime and R30 000 a year, which may not be enough to fund your retirement – but you can use a TFI in conjunction with your normal retirement product to give you greater access to equities and offshore investments, and reap tax-free returns.

Unlike in RAs and TFIs, your returns in a unit trust will be taxed – which will reduce your returns. The benefit is the freedom to invest into any assets and access to your money when you choose. However, you may be tempted to withdraw and lose out in the long term. We encourage investors to see an independent financial adviser who can help them make a decision that meets their needs.

What are the key issues an investor should consider before signing up for an RA?

RAs offer flexibility and choice for investors, but they have some restrictions that you need to be aware of: 

  • Prescribed legal investment limits restrict how much you can invest in the types of investments that are considered higher risk, for example equities and offshore investments;
  • You can only access your money after the age of 55; and
  • When you retire you can only withdraw up to one-third of your investment as cash (you may only withdraw all of it as cash if the total amount is below R247 500). The rest must be transferred to a product that can provide you with retirement income. 

To compensate you for these restrictions you can make full use of your tax deduction that is the greater of: 27.5% of total gross taxable income or 27.5% of total gross remuneration (subject to an annual ceiling of R350 000). 

What is the ideal proportion of a person's gross salary that should be invested into a pension/provident fund or RA? 

Assuming that you will be comfortable living off 75% of your pre-retirement salary, our research indicates that saving 17% of your salary is a reasonable starting point for the 25-year-old saver. This amount increases dramatically the later you start. You need to save 22% if you start saving at 30, up to 42% if you start at 40, and up to 59% if you start at 45. It is important to note that these numbers are simply averages and assume a consistent, inflationary salary increase each year, that you retire at 65 and that you earn an average return of consumer price inflation (CPI) plus 5%.  

Jeanette Marais is director of distribution and client service at Allan Gray.

This is part five of the cover story that originally appeared in the 10 November edition of finweek. Buy and download the magazine here.

pension fund  |  retirement annuities
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