Retirement funds – saving for your future
Often when we think of saving, it’s for a short- to medium-term goal such as a holiday, or a down payment on a house. But what about thinking further into the future?
One of the best ways to do this is to consider saving into a retirement fund.
We have found that political uncertainty and market volatility, not to mention the pressure of a shrinking economy, may lead many investors to allocate the bare minimum to retirement funds.
These funds, however, offer a number of distinct benefits that you may not be aware of, and reducing retirement savings due to short-term pressures may not be in your long-term best interest.
This is even more pertinent as we are living longer, and retirement savings will probably have to last for a lot longer. Therefore, any savings plan must take retirement savings into consideration, and how they form part of a holistic savings portfolio.
What counts as a retirement fund?
A retirement fund is a pension, provident or retirement annuity fund that is used to house and grow your pre-retirement savings, so that you are able to generate an income from your investments once you retire.
Tax deductions on contributions
Contributions to a retirement fund are tax deductible up to 27.5% of the higher of taxable income or remuneration, capped at R350 000. However, many people are not aware that retirement funds also allow you to offset contributions that were not previously deducted. They can be used to lower the tax payable on the lump sum cash portion taken at retirement, and even the tax payable on the income from your annuity.
Tax-free growth
A tax-efficient investment vehicle enhances the returns achieved by investors over the long term. Within a retirement fund, no taxes are paid on interest, capitals gains or dividends. This means your money effectively grows faster than it would in a taxed product.
Free from estate duty
Retirement funds are free from estate duty, which is typically levied at 20%. At death, retirement fund benefits are paid to your dependants, ensuring that your family is able to use the funds when you are no longer around. Your retirement benefit can help maintain your family’s standard of living after your death.
Costs
The competitive financial services industry is working in favour of investors when it comes to cost. Regulations ensure that all fees are transparently disclosed to investors. It’s important that you are aware of what you are paying in fees, as excessive costs can significantly impact the growth of your retirement money over time. We believe you should know exactly what fees and services you are paying for.
Protection
Retirement funds provide protection should investors experience tough times. Funds within a retirement fund cannot be attached by creditors. This means that if you are not able to repay your debts or are declared insolvent, your retirement funds are protected from creditors. This can allow for time to get back on your feet while ensuring that long-term retirement savings are protected.
Sound investment principles
Retirement funds are regulated by the Registrar of Pension Funds, governed by Boards of Trustees, and must adhere to the asset allocation limits as set out in Regulation 28 of the Pension Funds Act. Regulation 28 aims to protect the investor by encouraging sound asset allocation decisions. By limiting the exposure to certain types of assets, the regulator aims to ensure that investors don’t ‘bet’ all their money on a potentially volatile asset class, putting their ability to retire as planned at risk.
Regulation 28 – limits
Asset class limits
| Categories of assets | For all issuers/entities |
| Cash | 100% |
| Equities | 75% |
| Immovable property | 25% |
| Offshore assets | 25%* |
| Commodities | 10% |
| Hedge funds | 10% |
| Private equity funds | 10% |
| Debt instruments issued by or guaranteed by the Republic | 100% |
| Debt instruments other than above | 75% |
*As prescribed by the SA Reserve Bank from time to time
Navigating the complexities of planning for retirement can be daunting – especially in an environment where:
- investment returns are expected to be lower than in the recent past
- medical advances help us live longer, which means that your retirement income will need to last longer
- expenses are increasing
It is important to be aware of the benefits offered by retirement funds and to use them more effectively in saving for your retirement.
We all know that retirement is coming. For some, it may feel far away but it isn’t as though it just shows up one day and takes you by surprise. Get ready for it while you can and make the most of the time you have to invest.
This article was written by Shreekanth Sing, Technical Legal Adviser at PSG. For more information contact Stian Schutte at the PSG Wealth Nelspruit office”
