South Africa is facing many complex challenges. In the financial services industry, one of those challenges is our poor savings culture. The complexity of this challenge lies in the fact that if individuals don’t save, it negatively impacts society and the economy. As a result, government is reforming the retirement fund industry to encourage saving and, in doing so, change the trajectory of this concerning trend.
We believe that the lack of adequate financial education also plays an integral role in our poor savings culture. In this article, we unpack the features of four different savings vehicles available on the market today, to empower and encourage more individuals to save.
Employer-sponsored pension or provident funds are savings vehicles that employees contribute towards, for the duration of their employment. According to National Treasury, approximately two-thirds of formal sector employees belong to a retirement fund, which makes South Africa’s rate of occupational retirement funding coverage of formal sector employees amongst the highest in the world. This statistic inspires hope, but also begs the question: are these employees making the most of their occupational retirement funds? Most employer funds offer flexible contribution rates, which may provide flexibility, but the disadvantage is that many employees choose the lowest contribution rate to access a higher take-home pay. It is important to understand that employer-based retirement funds offer significant tax incentives, among other benefits, so members should try to contribute at a higher rate where possible.
If you belong to your employer’s fund, your contributions are deducted directly from your salary so you don’t “miss” the money that is saved in the fund. You also pay institutional fees, which makes it more cost effective than investing in other savings vehicles in your individual capacity.
When you leave your employer, you may be tempted to take your retirement savings as cash. This is where most South Africans fall short. You’ll pay tax on the amounts that you take as cash and you will have to start saving for retirement all over again. The older you are when you start saving for retirement, the harder it will be to save enough money to cover your day-to-day expenses.
There is no minimum amount needed to start saving in your employer’s fund. In most cases it is compulsory and you start contributing as soon as you receive your first salary.
Each retirement fund has its own set of rules that is approved by the Financial Sector Conduct Authority and the South African Revenue Services. You can’t withdraw from the fund while you are still employed but you can take all or a portion of your savings when you leave your employer. When you retire you can take one-third of your savings as cash, the other two-thirds must be used to buy a retirement annuity.
You will be liable for tax on any amount that you withdraw from your savings in cash. The first R550 000 you take over your lifetime is tax free but it is better to keep that tax-free amount for when you retire and you need to make the most of your life savings.
Your employer will require you to complete a nomination of beneficiaries form, which will help the trustees of the fund decide who should receive your retirement savings if you had to pass away.
Annuities are specialised investment vehicles that are governed by the Pension Funds Act (PFA). They are a good fit for self-employed individuals or formally employed individuals who feel they are not saving enough through their employer’s fund. There are various types of retirement annuities available on the market. Most annuities give you the option of investing a lump sum, monthly amounts via debit order or a combination of both. You can also have a say in how your money is invested, depending on the annuity you select.
Retirement annuities are tax-efficient and the growth on your savings is tax-free. Another important advantage of the annuity is that creditors cannot gain access to the money you have saved in your retirement annuity if you suffer a financial setback. In addition, your savings in a retirement annuity won’t form part of your estate, meaning that these savings won’t be subject to estate duty or executor fees.
If you need to access your money before the age of 55, you will have to pay substantial penalties.
You can access your savings at any stage after age 55. Pension law dictates that you can access one-third of this money as cash – the rest of the money must be paid out to you in the form of a monthly pension.
Most annuities require a minimum savings amount of around R500 to get started. It does, however, depend on the provider you choose to invest with.
There is no income tax or capital gain tax charged on the growth of your investment. You can invest up to 27.5% of your annual taxable income, subject to the R350 000 per year maximum, in an annuity.
The provider that you choose to purchase an annuity from will require you to complete a nomination of beneficiaries form. If you pass away, the money saved in the annuity will be paid out to the beneficiaries you named on this form.
The South African government introduced tax-free savings accounts in 2015 to encourage people to save more. All proceeds that you get from this savings vehicle are tax free, including interest income, capital gains and dividends. The tax-free amount is limited to R36 000 a year (which equates to R3 000 a month) and R500 000 over your lifetime.
The main advantage of a tax-free savings account is the tax savings you get on your investments. You also have flexibility when it comes to accessing your money – you can withdraw it at any time.
The limit on how much you can save in a year makes this investment somewhat tricky to navigate. If you withdraw money from your account, you can’t top it up later in the year. If you deposit money into your account that takes the balance over the set limits, you will pay 40% tax on that amount. In addition, to make the most of this savings account, you need to start your annual saving strategy while SARS starts its new financial year – in March.
Most banks and financial institutions offer tax-free savings accounts. You may need to spend some time reviewing the different products available before deciding which one would suit your needs best.
This will depend on the provider you decide to use.
As mentioned, your money in a tax-free savings account is available immediately – just remember that you can’t replace the money that you withdraw during each tax year.
If you pass away, your contributions to a tax-free savings account will form part of your normal estate – it will be dealt with according to your last will and testament.
There are various other ways to save for retirement, or for any long- and short-term goals. If you fit into the category of those who haven’t saved enough, or not at all, remember that it is never too late to turn your financial future around.
If you need more help understanding any of the savings products available on the market, NMG has several skilled and experienced financial advisors who can explain the pros and cons to you in more detail. You can contact us on:
T&Cs apply. NMG Consultants and Actuaries (Pty) LTD is an authorised financial services provider FSP 12968
