Humans are living longer than ever, making retirement planning more and more important, not to mention more and more complicated. It’s never too early or late to start planning for retirement, but it is important to plan actively. This begins with identifying your retirement income goals, considering your likely expenses, setting up some sort of savings programme, and managing your assets and risk.
In doing so, most people with the means will make contributions to a compulsory (retirement) savings product, either a pension or provident fund if you’re an employee of a company, or a retirement annuity fund if you’re self-employed or your employer has no retirement arrangements.
Compulsory products have a number of advantages. You deduct up to 27.5% of your retirement savings contributions from your taxable income, thus lowering your tax liability, while investment growth – interest, dividends and capital gains – within any retirement product is completely tax free. They also enjoy protection from creditors while the member is alive and the funds are invested in the product.
However, compulsory products also have certain restrictions, in terms of accessibility to the funds during different life stages, and allocation to various higher-risk asset classes.
As essential as compulsory savings products are to retirement planning, it’s important to consider diversifying beyond these into discretionary savings. These lack the tax advantages and creditor protection of compulsory funds, but also have no access or investment restrictions. In the event that you need money for unforeseen expenses, it can be accessed from discretionary funds, explains Braam Bredenkamp, financial advisor at GraySwan.
“If you are overweight in your retirement savings, you may not always have access to capital should an emergency arise – for example servicing a car or paying medical expenses not covered by the medical aid or gap cover – or, after retirement, the ability to compliment your drawings from a living annuity if you don’t want to keep the drawdown in check.”
The range of options available for discretionary investments is vast, with few to no restrictions in terms of the liquidity and underlying fund allocations you may consider.
“With our local interest rates currently offering great returns, fixed-interest investments, bonds or other interest-bearing options look very attractive, also because they mostly present very little to no investment risk in terms of short-term volatility,” explains Bredenkamp.
One option everyone should consider is a tax-free savings account, which is not subject to tax on interest, dividends or capital gains. This sort of investment has an annual contribution ceiling of R36 000, up to a lifetime contribution total of R500 000, presenting a great opportunity to bolster your retirement savings.
Investors should also consider the following investment vehicles:
Through various administrative platforms, these might also be known as investment plans or investment portfolios. Unit trusts are essentially unincorporated mutual funds, pooling investors’ money to invest in various securities and other underlying asset classes.
“There are usually numerous underlying investment fund options available,” explains Bredenkamp, “ranging from low-risk cash-based funds to high-risk equity-based funds, and varying levels of local and offshore exposure.”
There are no restrictions on contributions, withdrawals or the underlying investment structure. However, all growth and returns are subject to tax.
Endowments typically cover the same fund options as a unit trust, but in a somewhat different structure. During the initial five years of the investment, you can only withdraw once (up to the full value), and there are limits to further contributions too, while after the first three years the investment is protected against creditors. Moreover, an endowment is seen as an insurance policy with an investment value attached, thus the owner of the policy will also be the life assured.
Bredenkamp says there is a common misperception that growth within an endowment is tax-free. “However, this is not the case. All tax is just paid from within the investment on behalf of the investor, so any withdrawals you make can be seen as after-tax benefits, but not tax-free benefits.”
These are investments that focus on non-traditional investment strategies and assets, with a view to taking advantage of market inefficiencies. They are typically less liquid than traditional investments, but this is suitable for retirement planning provided you have capital available in other discretionary funds. Options include private equity, hedge funds, real estate, commodities and derivatives. When choosing an alternative investment, focus on legitimate options rather than get-rich-quick schemes, and treat them with the diligence you would any other investment.
With so many options to choose from and factors to consider, it’s prudent to engage the services of an independent financial consultant to help you prepare for a comfortable and fulfilling retirement. GraySwan has abundant experience providing personal and family office investors with guidance around financial planning and wealth management solutions.
GraySwan is an award-winning independent investment advisory and wealth management firm, serves investment advice through a global megatrend lens to institutional and corporate investors, financial planning and wealth management solutions to personal and family office investors. The wealth of their investment experience and the depth, strength and stability of their advisory and investment team amounts over 100 years. With offices in Stellenbosch, Somerset West and Johannesburg, the firm is one of the most experienced in terms of assets with over R16 billion under advice.