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Don't outlive your retirement savings

27-Nov-2017

More than 90% of South Africans retire without enough income


Author: www.fin24.com

More than 90% of South Africans retire without enough income as people live longer and fail to do proper financial planning, leading to inadequate retirement savings, says Errol Meyer, head of advisory services at Standard Bank.

“July is National Savings Month and I would encourage all consumers to start setting goals to ensure they don’t outlive their money. It’s crucial," says Meyer, “as well as a once-a-year check-up of a financial plan to ensure they adapt to changing circumstances and stay on track with their lifestyle goals.”

Opportunities to save more for retirement have increased significantly since the introduction of the tax-free savings account in 2015, and the 27.5% tax relief permitted for retirement fund contributions since March 1 2016.

“There could not be a better time than now for investors to seriously reconsider their lifestyle goals and significantly improve their future savings,” says Meyer.

Tax breaks on retirement funds

Some taxpayers, who have seen a hefty increase of up to 45% in their marginal tax rates since the 2017 Budget Speech, should therefore make use of all the tax breaks they qualify for.

The tax deduction for contributions to all retirement funds (including provident funds) increased to 27.5% of the greater of taxable income or remuneration, up to a cap of R350 000 per year, from March 1 2016. Only one-third may be taken as a lump sum in respect of the value built up after March 1 2016. This does not yet apply to provident funds, but is likely to do so from 2018.

Depending on the value of the lump sum, different tax rates apply. However, up to R500 000 of the lump sum escapes retirement tax, as well the balance that purchases a compulsory annuity.

“People who are planning for their retirement should engage the services of a financial planner, since the choices between a guaranteed or a flexible living annuity are of the utmost importance to ensure that you do not outlive your capital.

"Bad advice can become costly, especially in our present economic environment where people do not save enough for their retirement,” says Meyer.

The total contributions which can be claimed back from tax have increased, and so these changes are definitely there to encourage better outcomes in the future.

Tax-free savings accounts

Although tax-free savings accounts currently allow R33 000 to be invested a year, with a  limit of R500 000 for a taxpayer’s lifespan, they are  great for medium-term savings and topping up retirement savings. However, they do need to be distinguished from traditional retirement products.

“Unlike a pension savings strategy, this money can be accessed at any time – and this is always risky,” says Meyer.

Tax-free investments are not necessarily designed for retirement, but can be used in conjunction with retirement savings tools.

“Their objective is to get us to save more and this is always positive, especially when interest is compounded over the years.”

The power of compound interest

“The power of compounding – interest on interest – especially when it is tax-free, is something everyone should harness on a monthly basis as this really adds up over the long term. The earlier you start, the better. The same is true for the build-up of income within a retirement product,” says Meyer.

While the annual deduction limit for retirement funds is set at R350 000, if more is contributed the “unclaimed contribution” can be built up in a tax-free environment. When you do retire, you may then then take up to one-third of the value of your fund as a lump sum.

You are compelled to purchase an annuity with the remaining two-thirds, and disallowed contributions can be set off against the annuity as an exemption too.

“There are now more reasons than ever to review the products you have for retirement and make some important decisions to ensure you maximise all these new avenues.

Do an annual check-up on your finances

“Annual reviews of plans are certainly becoming far more important and complex. Health expenses, which increase with age, need to be seriously considered within these plans, for example,” says Meyer.

People should also consider annual increases to keep up with inflation – and perhaps even set an automatic annual increase.

Read the original article at www.fin24.com

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