The months January and February can be referred to as ‘retirement season’. This is a time when many South Africans decide to move into their next phase of retirement, but it is also the end of the tax year, which provides an opportunity for tax payers to put money aside for their retirement and get SARS to pay 40% of it.
Of all those South Africans who are in their 20s today, only 5% will be able to retire comfortably. This is a bleak picture and Anthony Katakuzinos, retail chief operating officer at Stanlib, says that the main reason for this is that people don’t think about retirement early enough to understand it and as a result often access their pension funds when they change jobs, instead of preserving them for retirement.
Katakuzinos says putting your pension into a preservation fund — a fund that ‘preserves’ your payout before you reach retirement age — makes sense because you don’t pay tax on the fund and the growth in value of the fund is not taxable, either. By placing in a preservation fund you can allow these funds, along with your new pension plan, to grow until you decide to retire any time after the age of 55.
You can’t top up the fund, but you can add more funds to a personal pension plan called a retirement annuity.
“Your preservation fund is tax free, so all gains and income can grow and be compounded to give you a better pool of assets to retire on,” Katakuzinos says. “Don’t underestimate the effect of compound growth on 100% of the returns you make on your pensions savings over 20 years.”
Even if you preserve your full pension over your working life, it will only give you about 60% of your final years’ salary as a pension.
“To enjoy a more comfortable retirement, or if you are self-employed, you can create your own pension plan by saving in a retirement annuity. So as with your pension you can save pre-tax into an RA. Your contribution to a RA is effective pre-tax, so R100 earned and saved is invested to grow in your personalised pension plan,” says Katakuzinos.
“You can invest into any number of unit trusts, giving you total flexibility in asset class selection and fund manager. The second tax benefit of an RA is that all interest and other income, as well as any capital gains in switching investments, are tax-free, allowing 100% of your funds plus all the income to grow over time.”
So take advantage of retirement season and invest wisely — be one of the 5% that can afford to sit back and enjoy retirement.
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