We already know that how, where and with whom we invest our money is important, especially when investing for retirement. A healthy retirement fund is usually the result of long-term financial discipline and a signature of hard work. It is also crucial to unlocking the glory of our golden years. So how do we go about navigating the anxiety of our investment decisions so that we can feel at ease with what we have collected and accomplished by the time we reach retirement?
For many, financial products like retirement annuities are confusing, with many South Africans struggling to make decisions they don’t really understand.
Floris Slabbert, the Country Manager of Ecsponent Financial Services explains the two types of annuities: A living and a guaranteed annuity.
“A living annuity allows you to choose how much you want to get paid monthly during retirement, and you will continue to earn income as long as your money lasts within the fund. The obvious risk is that you might outlive your money saved.”
Slabbert says that contributing factors to you outliving your money include poor investment performance, high administration costs and layered fees.
“The presences of these factors affect the required yield to sustain your income requirement from your living annuity.”
A guaranteed annuity however, is an insurance-type investment, Slabbert notes: “You hand over your retirement capital to an insurance company and in return you receive a guaranteed monthly income for the rest of your life. The income is determined in relation to your retirement capital and will continue until the surviving spouse dies.
“Note that your spouse will not necessarily receive the same income; this is normally based on a formula.”
A valuable piece of information is that the rate you will receive is normally linked to the current interest rate.
“Ideally, if you must decide between the two types of annuities, you should know the offered return should be higher when interest rates are higher. It is therefore important that the retired income levels you choose must allow for the lifestyle you want during retirement.”
One of the downfalls of this annuity lies within the realms of the estate, he adds: A”fter death, you will be unable to pass on your remaining retirement capital to your children.”
The annuity you choose depends on the amount of money you can invest into your retirement and the flexibility you want – or can afford – during that time.
“Every client’s financial needs are different, making the need for a clear investment strategy crucial,” Slabbert says.
What should I be contributing to my retirement and what are the costs?
Your contribution must be made in light of sound financial advice, but understanding your contribution as a percentage of your taxable income is a good place to start.
“You will receive an income tax deduction for contributions to a retirement fund of up to 27.5% of your annual taxable income, with a maximum limit of R350 000 per year.”
Unfortunately, though while you may save on tax this way for now, you will still be taxed as a retiree – albeit at a lesser rate.
“Remember though, all investment growth within an annuity fund is tax free. There is no capital gains tax, dividend withholding tax or interest levied within the retirement fund, and you may get a higher return with an annuity over other investments like an endowment.
“But, tax should not be the only area of interest when considering your contribution,” Slabbert emphasizes.
“Always bear in mind the costs involved in the annuity itself. Small adjustments on annuity payments and commissions can make big differences later. Understand them. For example, pay careful attention to an annuity invested in a policy, which usually involves more commission paid in advance. Other costs, like death cover will attract 36% tax.”
Protected from creditors
Section 37 of the Pension Funds Act of 1956 governs the protection of retirement funds against creditors. Every case has its own merits and should you be concerned about the possibility of a creditor laying a claim against your retirement fund, a consultation with your qualified financial planners should be arranged.
The Act also stipulates that R 3000 is the maximum deduction of a member’s retirement annuity to pay creditors. Further, section 37B confirms that pension assets do not form part of an insolvent estate. The full amount of your fund is protected against creditors should you be declared insolvent.
Note that Section 37D makes provision for some deductions like Income Tax, guarantees furnished by the fund on behalf of the member and amounts payable under the Divorce Act and Maintenance Act.
“Remember,” says Slabbert, “an annuity is a product that can maintain your financial wealth as you age and might just ensure that your money will outlive you. Although you will have to wait until you’re 55 years old to access it, keeping your money safe and healthy for the years you will need it most is something you will never regret.”