While 2023 may have left some of us feeling battle weary and cynical, a brand-new year allows us to dream again and plan for a better future. During the first few months of a year, we are typically more motivated to replace our bad habits with good ones. The author of the book, “Atomic Habits”, James Clear, advocates that people start small and make gradual improvements over time. This gives us more chance of succeeding than if we introduce massive changes all at once. As Clear explains: “Habits are the compound interest of self-improvement.”
Building wealth so that you can retire comfortably starts with developing good financial habits like saving and investing. Maintaining good financial habits is easier when you avoid a ‘big bang’ approach and focus on what is achievable, making steady improvements over time.
Saving for retirement means you are building a nest egg from which you can draw an income when you are no longer working. A retirement typically spans 30 years or more; therefore, it’s crucial that you start saving as soon as possible so that your nest egg has time to grow.
You may not necessarily need an income that matches your final salary at retirement (100% income replacement).1 For example, you could be debt-free and not paying towards children’s education. You won’t be contributing to an employer retirement fund, nor will you have work-related expenses (e.g. clothing and travel costs). To generate an income replacement ratio of 75%, you will need to have accumulated retirement capital that is 15 times your final salary on retirement. For example, if your final salary at retirement is R500 000, you need to have built up retirement capital of R7.5 million.2
There is no magic income multiple that covers all investors saving towards their retirement. How much income you need when you are retired will be determined by factors such as your lifestyle and healthcare needs. You also need to ensure your nest egg will cover ad hoc expenses such as home renovations and upgrading your car at some stage. A financial advisor can help you plan for your retirement: setting retirement goals and devising investment strategies to achieve these milestones.
Retirement annuities (RAs) remain one of the best ways to save for your retirement. Here are four reasons why you should consider investing in an RA.
1 A personal retirement savings plan that you can grow over time
If you have your own business, do freelance work or you are a stay-at-home parent, an RA can be a great way to save towards your retirement. You can contribute as little as R500 a month via debit order and/or make lump sum investments.3 You have the freedom to stop, start or make additional contributions to your RA. While there are no upper limits to how much you can contribute, there is a ceiling on how much you may be able to deduct for tax purposes each year (more about this later). Even if you belong to an employer’s retirement fund, you can use an RA to supplement your current retirement fund savings. If you get into the financial habit of saving extra income that you receive, such as an annual bonus or rent from a property, by ploughing it into your RA, it could make all the difference between retiring comfortably or running out of money.
Investment platforms, such as Ninety One, offer a variety of unit trust funds that are suitable for investing in an RA. A financial advisor can guide you to select funds that match your risk profile and meet the regulatory requirements of retirement funds.
An RA helps you to stay disciplined about your savings as you cannot access your retirement capital before the age of 55, with a few exceptions.4 You can retire any time from age 55.
2 Contributions are tax-deductible and investment growth is tax-free
Investing in an RA can help you pay less tax as your contributions are tax-deductible within certain limits.5
The tax deduction is limited to the lesser of:
- R350 000
- 27.5% of your remuneration or taxable income (whichever is higher)
- Your taxable income before the inclusion of any taxable capital gain
For example, if you earned a salary of R400 000 over a tax year and you contributed R60 000 to an RA, you will only be taxed on R340 000 (R400 000 remuneration – R60 000 in RA contributions).6 There are many different scenarios, so it’s best to consult a financial advisor or tax specialist to find out how an RA could help you pay less tax.
There is also no income, capital gains or dividend withholding tax payable within your RA investment, helping your retirement savings grow faster.
3 Tax relief on retirement lump sum benefits
When you retire from your RA, you may currently take a maximum of one-third as a cash lump sum. You could benefit from paying no tax on the first R550 000 of your capital that you take in cash, helping you preserve more of your retirement nest egg. The tax relief available to you will depend on whether you’ve previously received severance benefits, withdrawals or retirement lump sums, as the R550 000 is a lifetime limit.7 It applies across all retirement funds that you may have (e.g. RAs, employer retirement funds and preservation funds). Once you have reached this lifetime limit, additional retirement cash lump sums will be taxed according to the retirement tax table.
The remaining capital in your RA (at least two-thirds) needs to be invested in a living annuity or a life annuity. Your annuity will provide an income for you when you’re retired and will be taxed according to the PAYE tax tables.
4 Estate-planning benefits
You can contribute to an RA at any age and can choose to let your RA mature any time from age 55. But you don’t have to retire from an RA, if you don’t want to. The capital will continue to grow tax-free. On the death of an RA investor, benefits received by beneficiaries8 as lump sums or annuities are exempt from estate duty. Beneficiaries receiving lump sums can also take advantage of tax-free amounts if a member had not done so during their lifetime.9 Please note that RA contributions in excess of the maximum allowable tax deduction may result in estate duty being payable in certain instances.
Adopt good financial habits with the help of a financial advisor
As outlined above, an RA is a personal retirement savings plan that allows you to build a retirement nest egg in a tax-efficient way. How much you invest for your retirement and which solutions you choose will depend on your individual needs and circumstances, and what your existing investment portfolio looks like. A financial advisor can help you create long-term wealth so that you can retire comfortably. Find a financial advisor using our free tool.
Our Women and Investing hub contains a wealth of information, including planning for retirement and the value of financial advice.
1 Retirement income expressed as a percentage of pre-retirement income.
2 This example is purely for illustrative purposes. It is based on an income replacement ratio of 75% and assumes that you will buy an income-producing annuity with your retirement capital, drawing a starting income of 5% of your retirement capital.
3 The Ninety One Investment Platform’s minimum RA contribution is R500 a month, via debit order. Alternatively, the minimum initial lump sum is R100 000, with additions a minimum of R10 000.
4 See the Ninety One Retirement Annuity product guide on our website.
5 If your retirement fund contributions are more than can be claimed from tax in a given year, the excess contributions are carried over to the next tax year and can be used to reduce your taxable income.
6 This example is for illustrative purposes only. It assumes the salary was the only income earned during the tax year and that there were only RA contributions (no other retirement fund contributions) nor other applicable deductions that would have an impact on taxable income. When calculating the maximum tax-deductible contribution, member and employer contributions to all retirement funds must be taken into account.
7 Tax relief on retirement lump sum benefits is allocated once in a lifetime; if it’s used up you can’t claim it again – www.sars.gov.za. Also see the Ninety One Retirement Annuity product guide on our website for more information.
8 In accordance with Section 37c of the Pension Funds Act.
9 The tax relief on RA lump sums that is available to beneficiaries will depend on whether the RA member previously received severance benefits, retirement fund withdrawals or retirement lump sums. There is a R550 000 lifetime limit that applies across all retirement funds (e.g. RAs, employer retirement funds and preservation funds). Also see the Ninety One Retirement Annuity product guide on our website for more information.
