Retirement planning: Save money sensibly and it could save you
It is common for more specific, short-term savings goals such as holidays, houses or hobbies to take priority over distant, less-defined objectives such as retirement planning. Many younger South African earners may even feel that they cannot afford to save for retirement. But faced with increasing longevity and a more active lifestyle during the golden years, this #SavingsMonth, Just SA Business Development Manager Bonolo Mosoane says all South Africans should rather question if they can afford not to save for retirement.
Findings from Just Retirement Insights show that as a result of the pandemic, an increasing number of people in or approaching retirement have re-evaluated their retirement needs and have set financial goals and objectives that they are working towards.
“A proactive, planned approach to saving is the primary building block for a comfortable retirement,” says Bonolo. Yet her experience reveals a general lack of understanding of the retirement savings market from younger earners, many of whom are ill-equipped to make informed long-term savings choices to aid their retirement planning. While there is an exhaustive list of retirement savings vehicles available in South Africa, Bonolo highlights a few options.
1. Pension or Provident Fund
A pension or provident fund is one of the more common retirement savings vehicles but is only open for contributions from a company’s employees because it is deducted from your monthly salary. The problem, says Bonolo, is that they offer little to no flexibility. Within the fund, the trustees would have selected a shortlist of investment options for your retirement contributions (and perhaps even a recommended or default strategy) and while you may be able to choose one or more of the underlying funds, your choices are contained. If you resign before you retire, you can transfer your funds to your new company’s pension fund or move it to a preservation fund.
2. Preservation Fund
“When changing jobs, it is very important to ensure that your pension or provident funds are preserved for their original retirement savings purpose,” says Bonolo. “While it may be tempting to withdraw the full cash sum early, premature withdrawals have negative long-term tax consequences at retirement,” she adds.
Designed to specifically receive lump sum benefits from other pension or provident funds, preservation funds allow your savings to continue to grow. You are able to retire from a preservation fund at 55, before which you are able to make one partial or full withdrawal.
3. Retirement Annuity Fund
If your employer does not provide a pension or provident fund or you are self-employed, a retirement annuity operates completely independently and serves as an excellent tax-efficient savings vehicle for retirement. You have more choice over the provider or fund manager as well as the funds you want to invest in, within the limits set out by the retirement fund regulations. However, with much speculation in the media about changing regulations and legislation, Bonolo recommends seeking independent financial advice before making any significant investment decisions.
When you retire
With all three of the above retirement savings vehicles, when you retire, you can withdraw up to a maximum of one third of your savings in a cash lump sum, (a portion of which may be tax free depending on the overall portfolio of your retirement investments), while the balance must be used to purchase a product that will provide you with a monthly income for your retirement years.
“What’s important to realise,” adds Bonolo, “is that all three of these common retirement savings vehicles apply to the pre-retirement or accumulation stage of life, as you build up retirement savings during your working life through regular contributions. When you retire, you move into the decumulation phase, at which point you purchase a decumulation product which will allow you to draw down a monthly income during retirement.”
Living, Life and Blended Annuities
Not to be confused with retirement annuities mentioned above, people at the retirement stage choose between a life annuity or a living annuity solution to convert their lifelong savings into a monthly income to see them through their golden years.
New generation life annuities offer a secure, guaranteed income for life with greater flexibility to leave a capital legacy. If you value the flexibility of a living annuity but want to access a higher monthly income with higher certainty, a blended annuity offers a combination of the two.
“Although retirement may feel a long way off,” says Bonolo, “your retirement planning should start sooner rather than later. The longer you are invested in the market, the more the growth potential for your money. Which ultimately means you can secure a higher income and a more comfortable later life.”