Consider this when you retire.pdf

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Consider this when you retire
We all dream of having a carefree and financially healthy retirement. Unfortunately, for some of us this dream will never be realized. There are a number of reasons why the dream of a carefree retirement will remain elusive for some members of the public. These include: Not preserving retirement savings – for example, when changing jobs.   Not achieving the expected investment return on retirement savings, or fees eroding too much of their retirement savings. Simply not saving enough for retirement during their working lifetime.

It is generally accepted that in order to receive an adequate post-retirement income clients have to save at least 15% of their annual salary income throughout their careers. Of course, the later they start to save towards retirement, the larger this proportion needs to be.

Choosing the correct retirement savings vehicle
Say you had a look at your budget and decided you want to put away 20% of your salary each month to save for retirement. The next question, of course, is what is the best retirement savings vehicle to use? It is easy for you to become confused by the myriad investment vehicles available in the market, each of which has its own pros and cons. Therefore, the best place to start is usually to look at what you already have in place, such as your company’s own retirement fund. Most companies provide their employees with the opportunity to save for retirement by allocating a proportion of their pre-retirement salaries to the company’s dedicated retirement fund. The money allocated to this fund is deducted from employees’ salaries for taxation purposes, and usually a (limited) range of underlying investment options is available. But what if you are self-employed, or if your company’s retirement fund only allows you to allocate a proportion of your salary up to a specified maximum? You might, for example, like to allocate 20% of your regular salary towards retirement savings but the company might only allow an allocation of up to 15% of your salary. In this case, a retirement annuity could be the answer.

The advantages of a retirement annuity
A retirement annuity (RA) has the following characteristics that make it the ideal retirement savings vehicle: 1. The contributions paid into an RA are tax deductible up to a maximum of 15% of non-pensionable income, so SARS is effectively sponsoring a part of clients’ retirement savings! But what is nonpensionable income? Let us assume for the moment that the client is in full-time employment, and is remunerated by means of a basic salary plus bonuses and commissions. If the client is a member of a pension or provident fund and all of his or her basic salary is pensionable, while commission and bonus are not pensionable, he or she may claim 15% of his or her commission and bonus as a tax-free deduction to an RA. However, if the client is not a member of a pension or provident fund (for example, if he or she is self-employed) all remuneration is non-pensionable, and he or she may claim up to 15% of remuneration as a tax-free deduction to an RA. 2. RA investment returns are not subject to income tax, capital gains tax or dividend tax. This means no matter how much your clients gain in terms of investment returns, they will not be taxed on any of these gains. 3. The lump-sum payout at retirement (a maximum of one third of the accumulated benefit) or on death may be tax free within certain cumulative limits that apply to lump-sum payouts from all retirement savings vehicles, which is currently R315 000. 4. Upon death any benefits paid out from an RA are free of estate duty. 5. Part of an RA can be used to cover medical expenses when your client retires. After 65 all medical expenses are fully tax deductible. 6. And last but not least: You defer the payment of income tax. You are taxed on your regular RA income in the same way you are taxed on your regular pre-retirement income. However, post-retirement income will likely be lower than pre-retirement income, thus bringing along the possibility of being taxed at a lower marginal tax rate. One thing to remember is that by investing in an RA you are ‘locking in’ your investment until normal retirement age. So the soonest you can withdraw anything from the fund would depend on the fund rules, but this is normally age 55. However, this is not necessarily a bad thing, as you do not have to exert the self-discipline required not to touch any funds earmarked for retirement, which can happen so easily in a discretionary investment when times are tough. Now that we have determined an RA is a good vehicle to use for funding retirement savings, the focus must shift to which RA to use. Contact Shingi for further advice Shingi Matsanura 0833887940
[email protected]

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