The retirement challenge in South Africa

Have you ever thought about when you are going to retire and if you will have enough money to be able to do all the things you had planned once you leave work for ever? The reality for many of us today is that we will simply not have enough saved to let us lead the lifestyle we dreamed about at 30 years old. A sluggish economy, rising costs of living and increasing longevity have made it more difficult to retire than ever before and more of us will have to continue working later (health permitting) unless we have a sound plan in place.

The key to a successful retirement is to start saving as soon as possible and to leave your retirement savings intact until you actually need them. Too many people suffer from the cost of delay meaning that they put off their retirement saving until it is too late.

The table on the right illustrates this perfectly and shows how much needs to be invested to achieve R1 million at age 65. Assuming that the monthly amount invested does not increase over the term and 10% annual growth is achieved, a 25 year old would have to invest R178.74 pm whereas a 45 year old would have to invest R1381.24 per month to reach the same goal.

Ideally you should aim to replace 75% of your current income equivalent at retirement and a consultation with an accredited advisor will provide you with projections of how much you need to be investing now in order to achieve this.

Pre - Retirement products that we offer.

Retirement Annuity

Ideal as your only retirement savings plan or used in conjunction with your work pension or provident fund, a Retirement Annuity is a highly tax efficient way to save for your retirement. Contributions are tax deductible (limits apply), and growth within the RA is tax free. Funds can only be taken at 55 (exceptions apply) and will provide a maximum of 1/3 cash with 2/3 being used to purchase a monthly annuity. Investors have a wide choice of funds in which to invest their contributions.

Preservation Funds

A Preservation Plan is an investment designed to keep your retirement savings invested if you leave the service of your employer and don't wish to take the money you have invested in the company pension or provident fund. You retain full control of the investment and have the choice of where to invest your savings. You are permitted to make one withdrawal prior to retirement either partial or in full. At maturity, a Pension preserver pays out 1/3 cash with 2/3 to fund an annuity and the Provident preserver pays out a full cash lump sum.

Pension & Provident Funds

These are employer backed retirement schemes and membership is normally a condition of your employment. Contributions are normally based on a percentage of your salary and in most cases the employer will provide additional group life cover and disability cover.

On resignation from the employer, membership of the scheme will cease and you would lose all benefits. The retirement savings should be moved either to your new employer scheme if there is one or to a preservation fund. Risk benefits may be replaced on a personal level.

Options at Retirement

As you approach your retirement date it is essential that you consult an accredited advisor so that you are made aware of the options available to you and plan to access your capital as tax efficiently as possible. It may not necessary to mature all of your retirement products at once and depending on your circumstances, you may prefer to access other investments rather than your retirement plans thereby letting them continue to grow until such time as you need them. Your advisor will be able to recommend a plan of action after consulting with you and in most cases you will have two retirement income (annuity) options to choose from.

Living Annuity

A Living Annuity puts you in firm control of your retirement income. Investors choose an income level of between 2.5% and 17.5% per annum and can select to have an annual increase to keep track of inflation. The income specified may only be reviewed on an annual basis.

There is a full choice of investment funds in wish to grow your money whilst drawing down the income that you require. The less that you can afford to drawdown, the better the chance to preserve and grow your capital. You are also free to appoint a beneficiary/ies as you see fit so that the fund value not forfeit on death.

Guaranteed Annuity

A Guaranteed Annuity promises to pay you a monthly income at a pre-determined rate at the time of application. You may elect to have an inflationary increase on your income and specify a guarantee term, normally at least 10 years. The selected income would then be payable for 10 years and life thereafter.

The rate set at the inception of the annuity cannot be changed so the income is fixed for as long as the annuity is paid. This gives certainty to cautious investors. Investors in a guaranteed annuity should therefore aim to buy in when the rate offered is high so as not to be prejeudiced should the markets start to outperform the income rate of their annuity.

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