Paying off your bond might seem more financially savvy than adding cash to your retirement fund. However, what you gain on the swings – and swings there will be – could very easily be outweighed by what you lose on the roundabout.
In this article, we consider the reasons that a retirement fund is the best vehicle for your retirement savings.
Tip: It's never too late to invest in your retirement. However small the amount, you can start today.
Property pros and cons
At times, there is good money to be made in property, but there are also long periods when property prices seem to be going nowhere.
The FNB Property Barometer for August 2023 notes that, in South Africa, year-on-year growth slowed to 1.1% in July 2023, down from a revised 1.6% in June, as household incomes remain under pressure from high interest rates and a fragile economy.
Source: Statistics South Africa (Stats SA)
According to Stats SA’s Residential Property Price Index for December 2022, residential property prices have outpaced inflation since the start of 2011 – but only just. In December 2022, the value of residential property in SA was only 3.9% greater than it was at the start of 2011, when taking inflation into account.
The more commonplace alternative for retirement saving, an investment in a high equity fund, typically delivers returns of around inflation plus 5% per year after fees. A percent or two of additional annual growth will compound into much better performance over time.
There are a number of other reasons why a retirement fund is often a better vehicle for retirement saving, including the following:
- Contributions to retirement saving products – including pension and provident funds, and retirement annuities – are tax deductible. This means you are eligible to get some of your income tax back. People saving for retirement benefit from tax rebates on up to 27.5% of their income, up to an annual limit of R350,000. Also, there is no tax on investment returns (capital gains, dividends, and interest).
- A retirement fund offers a regulated savings environment and encourages discipline in saving. The funds become available only after a certain age, which removes the temptation to dip into your savings over the years. Also, you are often obliged to invest in an annuity. This is a tax-efficient product that will pay you a pension over the years.
- Because you will be investing your money over time, compound interest will accrue. Your investment will grow at a rate that accelerates in much the same way that a snowball grows ever-faster as it rolls down a hill.
When making a decision, the best place to start is with an honest audit of your circumstances. Set clearly defined goals and take time to research the available choices.
Tip: If you’re not a pension- or provident fund member, consider investing in a retirement annuity today.