RETIREMENT
Ensure Your Golden Years Are Glittering
What is retirement?
Planning for retirement
Set your retirement goals
1. At what age do you want to retire?
a. 55 years
b. 60 years
c. 65 years
2. How much income do you think you will need to support your monthly lifestyle?
a. R5000 - R15 000
b. R15 000 - R25 000
c. R25 000 - R35 000
d. R35 000 - R45 000
e. R50 000 and more
It is important that you contribute enough money per month to your retirement savings to ensure your retirement fund pays out the desired income on retirement. Also consider the impact of inflation, which greatly reduces spending power over time. Depending on the interest rate it is estimated that over 10 years the spending value of your money could drop between 30 to 40%. Over 20 years this would mean that R10 will only be worth roughly R32. Another example is that 2kg of branded rice that cost R3.25, 42 years ago compared costs roughly R35.99 today, an increase of over 1000%! This means that if you are currently living comfortably on R15 000 income per month, this amount will not be enough for you to maintain the same lifestyle in 10 years’ time.
3. Learn how to calculate your capital contribution per month.
This is how much you plan to save each month for retirement. It is recommended that you aim to contribute up to 10 - 15% of your annual salary to your retirement plan every year.
Here’s how to calculate how much you should contribute each month for retirement:
Multiply the number of years between your current age and your desired retirement age by 12 (twelve months in a year). For example, if you have got 45 years left before you retire, you will have 540 months to save towards.
Take the amount of income you think you will need to support your monthly lifestyle and compare it against the total amount of months you need to save, for and commit to an amount of money you can afford to contribute monthly to achieve your goal.
4. Things to consider before choosing a suitable retirement solution:
a) What kind of risk appetite (also called “risk taking”) you have means understanding some of the difficulties you may face in retirement and how prepared you will be for these.
Risks in retirement:
a) What kind of risk appetite (or “risk taking) you have means understanding some of the difficulties you may face in retirement and how prepared you will be for these.
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Living too long and possibly running out of income – outliving your money.
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Pension income not keeping pace with inflation.
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Consuming more than what your financial plan can sustain.
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Making inappropriate investment decisions.
b) Which financial product will give you the most beneficial tax breaks?
c) What products provide you with the right estate planning advantages?
Types of retirement solutions
The difference between a Retirement Annuity versus a Pension Fund versus a Provident Fund
Pension Fund
It is an employment condition for you to become a member of a pension fund unless if you are not permanently employed.
The fund will receive contributions from yourself and your employer (monthly) which are tax deductible up to a certain limit. The purpose of this fund is to accumulate a lump sum that will pay you a pension at retirement.
When you retire, you can access up to one third of the benefit in cash (which is taxable) and the remaining two thirds must be used to purchase an income annuity (which is also taxable). If your total retirement is less than R247 500, you can take the full benefit as a cash lump sum, which will be taxed.
If you leave a company before you retire (resign, dismissed or retrenched), you have the following options:
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Keep your savings in the current retirement fund.
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Move your savings to your new company’s fund (pension or provident fund).
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Move your savings to a preservation fund or retirement annuity fund.
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Withdraw as a cash lump sum (once off).
Note: You can take cash from every fund you withdraw from, however the tax calculation will allow a once-off R25 000 tax-free allowance in the first cash withdrawal. All the other cash withdrawals will be fully taxable, because the R25 000 tax-free allowance is once- off in a lifetime.
Provident Fund
A provident fund is the same as a pension fund but is different in the following ways:
Prior to 1 March 2021,
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Resignation in a provident fund is the same as a pension fund.
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When you retire, you can take the full cash lump sum (subject to tax).
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It is not necessary to purchase an annuity.
From 1 March 2021,
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Fund members were required to withdraw a third of their savings as a lump sum (subject to tax). All the savings accumulated prior to 1 March 2021 are still subject to the old regulations.
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Remaining two thirds must be used to invest into either a living or life annuity. (An annuity is a financial product that pays you a regular income when you retire.)
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An annuity is also taxable. If your total savings in the portion of the fund contributed after 1 March 2021 is less than R247 500, you can be allowed to take this portion in cash as well.
If you leave a company before you retire (resign or retrenched), you have the following options:
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Keep your funds in the current retirement fund.
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Move your savings to your new company’s fund (pension or provident).
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Move your savings to a preservation fund or retirement annuity fund.
Retirement Annuity
A retirement annuity (RA) is a fund where you pay monthly contributions yourself, without contributions from your employer. Anyone can buy an RA and you can have one as an addition to your pension or provident fund if you are employed.
When you retire (at 55 years or older), you can withdraw one third of your RA savings as a cash lump sum (subject to tax) and the remaining two-thirds must be used to purchase an income annuity (life or living annuity).
If your total amount in the fund is less than R247 500, you can take the full amount as a cash lump sum, subject to tax.
If you resign or change jobs, no difference will be made towards your RA because it is independent of your employer.
BUDGETING.
WhatsApp 072 606 0173 to learn more
Assessing your existing retirement plan
Why is your retirement fund so important?
Because it will replace your salary at retirement. A pension is around 75% of the salary you receive (assuming you have no bond to repay or school fees to pay.)
A retirement plan should be reviewed if there has been a change in your circumstances such as:
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Recently married, divorced or widowed.
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Became a parent or grandparent.
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Purchase of an asset or assets
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Sale of an asset or assets which are bequeathed in terms of your will to an heir.
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A change in your personal or financial situation.
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Change in legislation, e.g. the Budget Speech made by the Minister of Finance.
Your plan should be reviewed based on actual investment and market performance to ensure that you achieve your retirement goals.
Other additional benefits you can add to your retirement fund
1. Death benefit
2. Estate and Will Planning
1. What is a death benefit?
It is an uncomfortable topic but a death benefit is a payout to beneficiaries (dependants and/or other nominees) when someone who held a life insurance policy, retirement annuity or pension passes away. The death benefit is free of income tax however, in the case of annuity beneficiaries, tax may have to be paid on death benefits received. The recipients of a death benefit can receive their payout as a lump-sum, or as continued, regular payments. This is why having a will is so important – to give a clear indication of who will receive the benefit/s in the instance of a person passing away. Life insurance death benefits may be subject to estate tax.
2. The difference between Estate and Will Planning
Estate planning is the process of arranging which parts of your estate will go where when you pass away which will minimise tax burdens on your estate. The plan will include everything you owe and everything you own, e.g. cars, debt, property.
A will forms part of estate planning. This is a legal document that details your instructions about how your assets will be distributed, who your beneficiaries are and who will become the guardian of your children (if you have any) once you pass away. A will helps your family know which assets have been left to them and the state won’t have to decide what must happen to your estate.
Any person over the age of 16 who has assets can have a will, even if you only have a bank account.
1. What are the terms to know about a will?
Testate- A person who has left a valid will after they passed away.
Testator- The owner of a will who is still living.
Estate- All the money, debt and assets a person has left after they have passed away.
Executor of the estate- The person who is responsible for keeping the estate safe until the assets or money has been given to the people listed in the will.
Assets- A person’s belongings such as a house or car or money.
Liabilities- A person’s financial debts such as car repayments.
2. How to write a will
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Draw up a list of your assets: Everything you own – house, car, furniture, savings, policies, etc. and determine the value.
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Draw up a list of your liabilities: Your bond, outstanding debt, credit cards, etc. Make a full inventory of your assets and liabilities to give your financial advisor full sight of these so that he can draft a will that aligns with your overall estate.
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Decide on an executor: There can be more than one. At least one should be an institution e.g. bank, trust, company, etc. as it will make the process easier.
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When you have a good idea of your assets and your wishes, contact a law firm, bank or trust company that can help you create a will.
3. What happens if I don’t have a will?
If you die without a will, your assets or belongings will be distributed according to the Intestate Succession Act, 1987 (Act 81 of 1987) which means that your estate will be divided amongst your surviving spouse, children, parents or siblings according to a set formula.
The rules for the Intestate Succession Act are as follows:
3.1. If the deceased is survived by a spouse, the spouse will inherit the full estate.
3.2. If the deceased is survived by his/her children, the children will share the estate equally.
3.3. If the deceased is survived by spouse and children, then the spouse will get a child share or R250 000 (whichever is the greatest) and the rest will be shared equally between the children.
3.4. If the deceased had no spouse or children, his/her parents, aunt or uncles, and or siblings will inherit in equal shares.
3.6. If the deceased had no relatives, the funds from the estate will be placed in the Guardians Fund for a period of 30 years. If the money has not been claimed after 30 years, the funds will be distributed to the State.
Ensure that you have a valid will in place and make sure that you update it regularly especially if life events have happened.
Ensure that you keep up with legislation.
Let your family know where your original will is kept and give them the contact details of the person or organisation where your will is being kept.
Disclaimer: This information serves as a recommendation and should not be considered as advice. It is provided to assist you on your journey to financial wellbeing. Please speak to an authorised financial advisor in your personal capacity to further explore suggested products in greater detail.
