FAQ

backRetirement

A retirement annuity is an alternative to a pension fund for individuals that want to provide for their own retirement.
 
You can deduct contributions you make to a retirement annuity from your taxable income, up to  the greatest of: 15% of your non-retirement funding income; or R 1,750; or R3,500 less current pension fund contributions.  If your employer does not have a pension or provident fund, you will therefore be able to deduct contributions of 15% of your income from your taxable income.
 
At retirement, you can take up to one-third of the proceeds in cash.  The rest must be used to purchase an annuity income.

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There are a number of factors to consider when you compare these options:

  • Paying off your bond sooner provides a tax-free return equal to the interest rate payable on the bond.  To evaluate the return on this investment, you should compare the interest rate you are paying on your bond with the investment return you would expect to earn in the new Provident Fund.
  • Taking the Provident Fund lump sum in cash will have tax implications, compared to transferring it to a new Provident Fund or a Preservation Provident fund.
  • The additional monthly payments into the new Provident Fund may cause the total contribution to exceed the amount you can get tax relief on.
  • If you do decide to pay the Provident Fund lump sum into your bond, you must make sure that you remain disciplined in paying the excess into your new Provident Fund or a Retirement Annuity.

A registered financial advisor will be able to help you compare the available options, taking into account the tax implications and determining the most appropriate solution for your specific circumstances.

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In order to determine the most appropriate retirement income strategy for you, one would need to look at your total financial situation, e.g. whether you have any dependents and any other investments or sources of income.  A critical factor to consider is your current age, as the income from your retirement fund will need to last for your whole life.

There are a number of potential threats to your income and financial security post retirement:
• You may outlive your income
• Your income may not keep up with inflation, so that your standard of living declines
• Negative market conditions may impact your investments and/or income

A fixed pension will provide you with an income for life, but it is critical that you purchase one with annual increases in income, preferably linked to inflation; otherwise your income will not keep up with your living expenses.

A living annuity does not provide a guaranteed income for life, but do allow more flexibility with regards to the level of income you withdraw (between 2.5% and 17.5% of the investment value at that point). However, if the initial level of income selected is too high and increased annually by inflation, the withdrawal percentage will at some point be capped at the maximum, after which it will not be possible to increase income by inflation any more. Income may even start reducing.

A wide range of investment funds are available for living annuities.  Choosing an appropriate investment strategy is important, as you will need to balance earning an investment return that can support annual increases in income, and limiting the volatility in the investment value. A significant fall in investment values may have serious consequences for the level of future income that can be sustained.

Retirement income choices are complex and the decisions you make will have serious implications for your financial security in retirement.  It is therefore recommended that you speak to a registered financial advisor that in order to determine the most appropriate strategy given your specific situation.

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If you start saving for retirement in your thirties, a rough guideline is that you need to save 15% of your income every month in order to retire at age 65 with about 60% of the income you earned before retirement. 

Typically, one would need less income after retirement, as some of your expenses would fall away, e.g. travelling to work. However, you need to keep in mind that other expenses, such a medical costs, could increase as you get older.

If you are currently saving less than 15% of your income, it would be a good idea to increase your contribution. Make sure that you increase your contribution every year as your income increase with inflation.

You also need to think carefully about when you plan to retire. An additional five years of work will mean five more years of saving and investment growth, and five less years that you need to live off your retirement provisions. This could have a big impact on your financial situation after retirement.

A registered financial adviser will be able to determine whether you are on track with your retirement savings and how much additional savings may be required.

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A retirement annuity is a good option for retirement savings if you do not have the option to join an employer provident or pension fund, as contributions can be deducted from your income for tax purposes.

Currently you can deduct contributions to a retirement annuity from your taxable income up to the greater of:

  • 15% of your non-retirement funding taxable income per year
  • R3 500 less current deductions to a pension fund, or
  • R1 750

As you do not belong to any retirement fund, you should be able to deduct contributions equal to 15% of your taxable income. This percentage is expected to increase from 1 March 2016.

On a Retirement Annuity you can take up to one third of your proceeds in cash at retirement. The rest must be used to purchase a life or living annuity to provide you with income.

It is important to ensure that your retirement savings work for you by earning a decent return in excess of inflation. Most retirement annuities have a range investment options available, offering different levels of risk and investment return. Make sure you invest through a reputable institution, as your retirement investment must still be around when you retire.

Determining how much you should contribute and deciding on an appropriate investment strategy can be complex.  A registered financial advisor will be able to provide you with advice appropriate to your specific situation.

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