26 Jul All you need to know about Retirement Planning
Retirement is sometimes seen as very far away for young people, but it creeps up on you suddenly and if you did not provide properly, retirement will be a very stressful event in your life. We just need to do a little bit from very early in life to make it easier.
When you retire, there are two baskets of assets that you need to have.
- The first one comes from Pension funds, Provident Funds, Preservation funds and Retirement Annuities. Most of the capital from these investment will provide income.
- The second basket will provide for emergencies, travel accounts, a new car, topping up income etc. Call this you top-up account.
Both of these baskets needs time to build and I call these investment the ‘DO NOT TOUCH MONEY’. This means that you start them and other than checking on the growth every year, you forget about them. These are not be stopped or withdrawn before retirement.
Both of these baskets can provide tax benefits which you have to use or lose out.
Income or Pension post retirement:
New legislation starting on 1 March 2016 allows you to invest 27,5% of your gross income in Retirement Structures and claim the tax benefit. This is capped at R350,000 per annum. Retirement structures consists of Pension funds, Provident funds and Retirement Annuities.
If you do not contribute up to 27,5% of your gross income to your Pension fund or Provident fund and the rules of the fund does not allow you to increase your contribution, you need to use a Retirement Annuity structure to make sure you contribute the full 27.5% per annum. If you do not use this, the tax benefit is lost every year. These investments provide the biggest tax benefit that you can get as you get a percentage of your premiums as a tax deduction depending on your marginal rate of tax. If you are on a 30% marginal tax rate, you get R30 rand back out of every R100 invested. This is before any growth on your investment. Where will you find anything that gives you that much growth on your investment? In these pension structures you also do not pay any Capital Gains Tax, Dividend withholding tax or tax on interest, which you will pay on any other asset. Furthermore, retirement structures do not fall in your estate so you will not be liable to paying the 20% estate duty on these investments. (Providing you do not add more to these investments than the 27,5% per annum. Anything over 27.5% per annum will fall into your estate.)
When you retire, Pension funds and Retirement annuities pay out one third in cash and two thirds as income. Provident funds can be taken in cash but this will change in 2018. There is tax payable on the portion you take in cash and it would therefore be more tax effective to take the income rather than a big lump sum. This is the reason you need to have top-up funds.
Top up funds:
These funds will provide for any emergency post retirement, maintenance to property, travelling, purchase of a vehicle and also additional income if needed. Should you not have these funds post retirement, you will be in trouble. You cannot get lump sums out of the pension that you receive from the retirement structures discussed above. This means that you will not have any money if you suddenly need cash for an emergency.
The only other investment that will provide tax benefits is the tax free investment structure available since 1 March 2015. This investment is perfect as part of your top-up funds. In this investment you will not pay any capital gains tax, dividend withholding tax or tax on interest. There are however two rules linked to this type of investment. You cannot invest more than 30,000 per annum and R500,000 per life time. This means it takes time to build up the investment as your tax benefit on R30,000 is low. It will take about 16 years to invest R500,000 at a rate of R30,000 per annum. If you assume that your investment has grown to R800,000 by the time you invested the full R500,000 and you then stop investing but keep the investment going until retirement age , when it can be worth a million or two depending on how long the time frame is, you will have all this capital available to you free of tax. You and your spouse can each use this investment providing a nice amount of tax free capital post retirement. After using all the tax benefits, you can start investing in the stock market, offshore investments, and investment properties etc. to use as additional top-up funds.
As we all know, retirement planning takes time and you cannot have sufficient provision overnight. When you are young, you might have children to look after, bonds to pay etc. This means that you might not be able to invest into the above mentioned tax efficient investments to the fullest, but you have to start somewhere, Even if you invest the minimum premiums into your Retirement Annuity and your tax-free investment and increase this a small amount every year, you will be better off than doing nothing.
Rilette Haycock
Financial Planner- NMG Wealth
BSc, CFP, Advanced CFP