As we approach the end of the tax year on 28th February, it’s time to revisit our retirement funding goals and consider topping up retirement annuities to take advantage of the tax benefits. It’s a sad reality that only 6% of South Africans can retire comfortably, but having said that, there’s no need to panic. There are many strategies we can employ to get you to retirement with your finances intact. The real enemy is simply doing nothing at all, so just starting to save consistently over a period of time is a great step in the right direction – remember Rome wasn’t built in a day.
Tax deductible Retirement Annuities
Contributions of 27,5% of gross remuneration or taxable income (whichever is the higher) are tax deductible subject to an annual limit of R350 000. For employees who also have a pension or provident fund, the total retirement funding may not exceed the said 27,5% or R350 000 for tax deduction purposes. So, your retirement contributions can be deducted (up to the limits mentioned) from your taxable income which means that you could receive a tax rebate from SARS after assessment of your tax return. The income and capital growth earned on your investment in the Retirement Annuity (RA) are also tax free until you retire, resulting in a bigger lump sum on retirement. on a favourable basis according to the SARS sliding scale with a portion being tax-free.
The Tax Saving is R46 460.50
Who can benefit from a Retirement Annuity?
- Self-employed persons
- Employees with no corporate pension fund
- Employees with a corporate pension fund who wish to save extra for retirement
Benefit from a Tax-Free Savings Account
A tax-free savings account may be utilised to further supplement retirement funding or to save for shorter term lifestyle events. There is no tax on income or interest, no dividend tax and no capital gains tax.
You can choose from a wide selection of bank account products or equity funds depending on your risk profile and needs. You can also invest for minor children.
An investment of a maximum of R33 000 per person per annum is allowed subject to a R500 000 lifetime limit.
The TFSA investment of R33 000 per annum is allowed in addition to the normal interest exemption which currently stands at R23 800 for persons under 65.
“Compound interest is the eighth wonder of the world. He who understands it, earns it – he who doesn’t pays it” Albert Einstein
Ensure that you are one of the 6% of South Africans who can afford to retire comfortably
When you retire, you generally need less income than during your working life. This is simply because some of your expenses like travelling to work fall away and children and education costs are a thing of the past. Depending on your retirement plans, you would typically need at least 60% of your final pre-tax salary after retirement.
What can be done if retirement is looming and your retirement funding projections fall short of the 60% goal?
The first thing is not to panic and make a hasty, ill-considered decision with the money you do have.
The second step is to consult a financial planner to formulate a plan to manage the shortfall. A financial planner will not have a miracle cure for the 10 years where you didn’t save, but they will be able to advise on the best investment for your retirement savings and suggest life-style strategies that can be employed to move you closer to the goal.
Consider Relocating or Downsizing
If you live in an area with a high cost of living, moving to a less expensive area and investing your savings for retirement could make a big difference to your ability to amass a nice nest egg.
If your children have left home and you're still living in a big house that has appreciated in value, consider selling it and buying a smaller, less expensive home. You'll save not only on your mortgage payments, but in less obvious places like the cost of rates, electricity, insurance and repairs and maintenance etc. You can divert all those savings to boost your retirement plan.
Delaying retirement and therefore withdrawals from your retirement fund can help a great deal, even if it’s just for a few years. If full time work is a bit much, consider consulting or working fewer days or less hours per day. Since you will no longer be contributing towards retirement funds during this period and may have down scaled your home, you will require much less income to cover your living expenses. Left untouched, your retirement fund will continue growing. Even if you assume an ordinary savings account, nothing fancy, with an interest rate of 8% compounding over 5 years, your capital will increase by 25%. Other investments, such as a balanced fund should achieve higher returns than a fixed deposit and therefore increase your pension income by over a third for the rest of your life.
Remember you don’t have to start withdrawing from retirement funds at any specific age, so you can delay withdrawals for as long as possible.
Plan on a second career
These days many people have the potential to live long and healthy retirements. Do you really want to sit around doing nothing from 55 to 100? If you are not able to remain at your current employer after a certain retirement age, in the years leading up to retirement, you may want to upgrade your skills, study something new or start a small business.
The chances are a second car spends most of its time in the garage. Consider selling it and taking an Uber for the odd occasions when you need two cars. It will work out much cheaper than R300 000 worth of capital parked in a garage, and that capital can be put to work in your retirement fund.
Ideally, we should all have a retirement plan in place throughout our working lives. However, during the last 10 to 15 years before retirement careful consideration needs to be given to be given to life-style and savings goals to ensure that you do not outlive your assets. For assistance with retirement planning, feel free to contact us at