There are many reasons why you need to start saving for retirement sooner rather than later. The obvious one is that you have enough time to build a large-enough nest egg on which you can retire comfortably without having to depend on either your children or the government for a living. But another is that you can take advantage of the government’s tax breaks on retirement savings for that much longer.
Research by Liberty shows that many working South Africans only start to think about saving for retirement once they are over the age of 40, and are therefore not benefiting from the tax advantages that will help them build a substantial nest egg for their retirement.
Contributing to a retirement fund allows you to save a large chunk of your earnings tax-free every year. You are entitled to claim a tax deduction for your contributions (subject to specified limits) and your money will grow tax-free in the retirement fund itself – in other words, it is not subject to normal taxes on an investment: tax on interest earned, capital gains tax and dividends tax.
As an example of how much you save in tax on your contributions, if you have taxable income of R500 000 a year and contribute R100 000 to a retirement fund, you're taxed only on R400 000. Using the current tax tables, assuming no other deductions, you would pay tax of R119 830 on R500 000 and R88 265 on R400 000, so you save R31 565 in tax. Or, looked at another way, of the R100 000 you save, only R68 435 comes out of your pocket.
When you retire, you are allowed to take one-third of your savings in cash - the other two-thirds must be used to “buy” a pension. On your cash lump sum, the first R500 000 is tax-free, with the balance taxed at a preferential rate. Then, your pension from the remaining two-thirds will be taxed as income, but you will be paying lower income tax for a number of reasons: you’re likely to be earning less than when you were working; you have higher rebates from age 65; and you can claim more for medical expenses from 65.
Retirement savings vehicles
If you are not contributing to a retirement fund linked to your employer – or even if you are – you may consider saving in a retirement annuity fund (RA). These are attractive because they are portable (not tied to an employer), have no contribution limits, and your retirement benefits can be accessed from the age of 55.
Although RAs remain one of the popular options, Liberty’s research found that at least 59% of South Africans perceive RAs as expensive.
"Having a comfortable retirement or being in a position to live life the way you want at a certain age should rate as an important life goal. But somehow many South Africans are not ‘getting’ this until they are older," says Nosipho Nhleko, lead specialist, investment propositions at Liberty.
Only 31% of people between 30 and 35 have established a proper retirement savings plan, according to Liberty’s research findings conducted in an effort to understand retirement trends from an insurer perspective. By the ages of 45-49 this figure jumps from 31% to 63%. So South Africans become financially wiser as they get older, but it also indicates that too many South Africans are setting up their savings plan too late.
"The fact is, the earlier you start saving, the easier it is and the more you can put away for a comfortable retirement. Every circumstance is different, and partnering with a financial adviser is the best way to plan your personal financial journey. The sooner you start, the better. You may well be saving yourself quite a bit of money in the long-term if you start early, while securing the life to which you aspire," says Nhleko.
This article first appeared in the July 2022 issue of our free digital magazine, IOL MONEY.