Perhaps you’re sceptical about retirement funds because they come with various restrictions. As a result, you may have wondered whether you can prepare for your retirement without making use of one.
We find out what you may be missing out on if you choose this route, and we briefly consider some pros and cons of retirement funds.
Tip: You can open a tax-free savings account and use this as part of your retirement planning.
Tax considerations
Lana Visser, financial planner at Fiscal Private Client Services, notes that different investment vehicles have different features in terms of taxation and accessibility. Tax efficiency should always feature in your investment planning, and retirement funds tend to maximise this.
If, for example, Visser explains, you choose to invest in a unit trust, any interest above the annual exemption is added to your taxable income, and taxed at your marginal rate.
“The more your investment grows, the higher your income will be and the more you will be taxed. Since saving for your retirement is considered a long-term investment, the capital gains that will be lost when you redeem your units may be very high,” Visser says.
On the other hand, she explains, income and growth within a retirement fund isn’t taxed, and any contributions will provide you with a tax benefit, up to certain limits.
“Upon retirement, up to R500,000 may be taken as a tax-free lump sum, depending on previous withdrawals,” Visser says. “Although your monthly income will be taxed according to the standard tax tables, a retirement fund is a very tax-efficient vehicle.”
What are the pros and cons?
Visser says that the downside of a retirement fund is that you won’t be able to access your retirement benefits before the age of 55.
“Upon retirement, the benefit is used to purchase a living annuity, which pays out a monthly income within certain limits. The funds are, therefore, not freely accessible. However, a unit trust offers liquidity if a lumpsum is needed sooner, or at short notice,” she says.
Visser believes that it’s key to structure your portfolio according to your goals and needs. Depending on the funds you have available for investments, it’s good to invest in various options for different purposes, and to take advantage of the benefits that each vehicle provides.
Danie van Niekerk, executive head of financial services at Indwe Blue Star, says that even though any investment vehicle can be used to make provisions for retirement, you need to get the opinion of a financial adviser when making your final decision.
He explains that it’s important to fully understand what you will gain or forfeit by using specific vehicles for your retirement needs.
Have a look at the tax-friendly savings vehicles on the JustMoney platform – find out more.