We’ve already established that it is important to save for your retirement and how to work out how much you should be putting away. Now it’s time to consider the different saving options available to you.
There are four basic options when you save for retirement: a pension fund, a provident fund, a retirement annuity or you could simply save directly via unit trusts. Note that both a pension and provident fund are typically employment benefits while a retirement annuity and a unit trust would form part of your discretionary savings.
We look at these savings vehicles in more detail:
Pension funds: Your contributions up to 7.5% of your pensionable income (basic pay before allowances) are tax-deductible, and all the investment returns are tax-free. Your employer’s contributions to your pension fund are tax-free, up to a limit of 10% of your employment income.
When you retire, you can withdraw up to one third of your benefits as a lump sum, with scaled tax exemptions as per the retirement tax tables from SARS. For example, the first R500 000 you withdraw is tax-free while the next R200 000 that you withdraw is taxed at 18%. You must use the remaining two thirds of your benefit to buy an annuity or pension. This pension is then taxed at your tax rate, depending on your income bracket.
Provident funds: Your contributions are not tax-deductible, but the investment growth is tax-free. The contributions your employer makes are tax-free. When you retire, you receive all your savings from the fund and this is taxed as per the retirement tax tables from SARS (see above).
Note that government has started introducing retirement reforms to encourage you to save for retirement and discourage the practice of cashing out your retirement savings when you change jobs. This means that provident funds are likely to eventually be phased out and changed to the same structure as a pension fund. (You can only access up to one third of your pension fund when you change jobs but you can access the full amount in your provident fund)
Retirement annuities: You can use an RA if you do not have a retirement fund benefit through your employment or you simply want to supplement your existing retirement savings. There are two different types of RAs – unit trust RAs and life assurance RAs. Unit trust RAs are more flexible because you can reduce or even stop paying contributions without facing a penalty. So, if you are retrenched, you can stop contributions without losing any money. Life assurance RAs, on the other hand, are contractual and any reduction in payments, for whatever reason, are likely to result in a penalty.
Your contributions to an RA may be claimed as a tax deduction. The tax deduction will be the greatest of three choices: R1 750 a year or R3 500 of fund contributions or 15% of any earnings above those used for contributions to an employer-related retirement fund. You can draw a pension once you turn 55. Similar to a pension fund, you may take up to one-third of your money as cash and must buy an annuity with the rest. You will pay tax as per the retirement tax tables from SARS.
Unit trusts: Investing in a unit trust directly is an option but a retirement annuity offers you a tax benefit and the underlying investment is a unit trust anyway. There are two types of tax that you pay on a unit trust – interest tax and capital gains tax. If you are under 65, the first R23 800 you earn in interest is tax-free. If you are over 65, the first R34 500 you earn in interest is tax-free. Thereafter, you are taxed according to your income bracket.
You have to pay CGT on 33% of your total capital gain. So, you have to work out what your total capital gain is. You will then pay income tax on that portion (33%) of your gain.
Now that you have all the options at your fingertips, all that’s left to do is to start saving! Speak to a personal financial planner about the best option for you and remember the golden rule of retirement saving: refrain from cashing in your benefit when you change jobs. Rather squirrel the money away for your retirement.