This article is about retirement. No! Stop! Let us finish.
This is more important than you think. As we head towards the end of the year, you’re probably in such need of a holiday that all you may want to do is retire. But seriously, it is closer than you think.
If you are 30, you are 420 pay cheques away from retirement. If you’re 40, you are only 300 pay cheques away. Right now, you are only one pay cheque away from Christmas. Time seems like it drags on forever and then all of a sudden, there isn’t enough of it.
Now think about how much time you have to save for retirement. If you retire at 65 and live until 85 you’re going to need the equivalent of 240 pay cheques. Hopefully you know where they’re going to come from…
So, now that we have your attention, let’s talk about how you save for retirement. Typically there are three ‘retirement funding’ vehicles. It is best to save in one or more of these vehicles before you retire.
Once you have retired, you will need an investment vehicle which actually pays you a pension throughout retirement. Typically there are two types of annuity paying vehicles you can choose from.
PRE-Retirement savings vehicles
A RETIREMENT ANNUITY – allows you to save towards retirement prior to you actually retiring. It is often used by self-employed people or by people who wish to top up savings because they feel that other savings vehicles aren’t quite enough.
Retirement annuities can also help reduce your annual tax burden as there is a tax savings up to a certain limit on the amounts you contribute.
At age 55 you are able to take one third of the money you have saved as a lump sum (subject to taxation) and the rest you must use to purchase a compulsory annuity which will pay you a monthly amount into retirement.
The Satrix equivalent of a retirement annuity is called the Satrix Retirement Plan.
A PENSION FUND – is a fund set up by your employer, and employee contributions are tax deductible. This means the contributions are deducted from your salary before you pay tax. You may contribute to the pension fund right up until retirement if you remain in the employ of the employer. At retirement you are able to take one-third of the available value in cash, which you will be taxed on, and with the remaining capital you have to buy a compulsory annuity.
A PROVIDENT FUND – works in a very similar way to a pension fund. There are two differences. One is that on retirement you are able to take the entire amount as a cash payment, subject to tax. And the other is that your contributions prior to retirement are not tax deductible.
You can transfer your savings from a provident fund to a pension fund on changing jobs, but you cannot transfer from a pension to a provident fund. The transfer will be tax free.
A PRESERVATION FUND – does just that, it preserves your retirement savings if you change jobs, are retrenched or dismissed. You are able to transfer your accumulated pension or provident fund savings into a preservation fund tax-free, and are then able to continue growing the capital over time. Depending on the rules of the fund, you may be able to take one withdrawal from the fund prior to retirement.
All these explanations must be telling you a few things viz. government is trying to encourage everyone to save for retirement by offering them tax breaks AND government doesn’t want you to touch that money before you retire, so they limit the amount you are able to withdraw and deter you with taxation on withdrawals. These incentives are really to protect you and allow your money to grow. Take note of them and make them work for you. Not only will the tax deductions mean that your take home pay is higher, you will also be making an effort to retire in comfort.
If you find all of this overwhelming or it just ‘isn’t your thing’, we would encourage you to make contact with a financial advisor. Advisors are trained to help you make the most of your money and research has shown that people who do make use of financial advisors are not only better prepared for retirement, but also have a higher probability of reaching other financial goals as well. Think of them as a financial coach helping you on the road to financial freedom.
POSTED : 2 DECEMBER 2015