What are the best retirement products?

It is vital that every working South African saves towards their retirement. The most obvious way to do this is to make a monthly contribution into a retirement annuity (RA), but is an RA the best option? Ad should you look at putting money away in a variety of different products?

We spoke to Ricky Rohrbeck, an independent financial advisor with Select Independent, to find out the best ways to save for retirement. He explained the different products.

Retirement Annuities Retirement annuities are a class of investment product that are regulated by government to ensure security for retirees. They are governed by Regulation 28, which is a set of restrictions that prevent too much exposure to risk in the fund portfolio. Generally speaking, retirement annuities offer returns in the range of 8% to 12% per year, depending on the funds you select, providing steady growth for your capital until retirement.

The real benefit of investing in a retirement annuity is the tax deduction it allows. The portion of your salary that you put into an RA (up to 27.5% or an annual maximum of R350 000 is allowed) is tax deductible, which means that your taxable earnings will not include that amount. For instance, if you earn R15 800 but you put R2 500 into your RA every month, you will only be taxed on R13 300.

On retirement, your RA can be paid out as a lump sum of one third of your capital (the first R500 000 of which is not taxed, the remainder of which is taxed in line with withdrawal benefit tables), and then reinvested in a specialised product which pays you a monthly, quarterly or annual “annuity” to fund your day-to-day retirement. This is annuity is taxed as income.

If your total retirement capital is less than R247 500 at retirement, you may withdraw the entire amount without two thirds being allocated to creating an annuity.

The tax advantages or an RA are hard to beat, so it is a good idea for investors who are focused on planning for their retirement to put as much of their salary as they can up to the maximum allowed into an RA.

Pension and provident funds Pension funds are retirement products established by companies for their employees rather than taken out by individuals as is the case with an RA. They are governed by pretty much the same regulations in terms of taxation and the R500 000 tax-free lump sum withdrawal.

If you leave the company, you are allowed to withdraw your pension from their fund, although it is strongly advised that you move it to your new employer’s pension fund, or put it into a pension preservation fund so that you do not spend what you’ve already saved for your retirement. If you draw and use the money when you leave the company, any amount over R25 000 will be taxed according to SARS’s retirement fund lump sums withdrawal benefits table.

A provident fund is a corporate retirement product that currently allows for a full withdrawal of the total capital on retirement (no annuity payments are compulsory). However, under government’s retirement reform programme, the taxation on provident funds is now bringing them in line with the other two retirement products.

Tax-free savings accounts Tax-free savings accounts were created by the government with the intention of addressing the low rate of long-term (or any) savings among South African citizens. The amount invested is not tax deductible, but any interest or dividends earned on these types of accounts is tax free.
You are limited to a maximum investment of R33 000 per year, with a total lifetime limit of R500 000 invested.

Tax-free savings accounts are generally not much better than other savings or investments products on the market at the moment – unless you are in it for the long term. This is because there is already a tax exemption on the first R23 800 that you earn in interest in any year, and even if you were investing your maximum allowance into a tax-free savings account, it would take you six years to earn that kind of interest.

Tax-free savings accounts can deliver greater growth than retirement funds because they are not bound by Regulation 28, but they would still be hard pressed to deliver sufficient growth to make up for the tax deduction advantage of specific retirement products.

Other investments Other investments over and above retirement savings – including unit trusts, ETFs, money market accounts, savings bonds and so on – are a good idea. However, while some products can offer better returns if you are not risk averse, they don’t offer the upfront tax advantages of retirement products.

Regular investment products are not ideal for retirement because they are accessible.

Having various investments in your portfolio to helps you meet your short-, medium- and long-term goals, but regular investment products are not ideal for retirement because they are accessible. Throughout life, there will be times when you need money urgently for whatever reason. If the funds are not locked into an allocated retirement product you will access them and use them.

The bottom line Retirement annuities (or pension funds) have been tailor-made to meet your retirement needs. While it is a good idea to take advantage of all the tax and growth benefits offered by the range of investment products available to you, for long-term retirement savings, RAs offer the best benefits on the market. It’s a good idea to meet with a financial advisor to discuss your short-, medium- and long-term needs and to ensure that you are investing the right amounts in the right products to meet these needs.

You can also check out last month’s blog post to learn how to calculate how much you should be putting away for your retirement.