RETIREMENT PLANNING
Planning for your retirement
The pot of gold at the end of the rainbow is what we all supposedly work and wait for to retire comfortably.
The focus is to set adequate funds aside on a regular basis to provide a post retirement income.
You can never start soon enough in your wealth accumulation as the compounding effect is phenomenal. People are now living longer than before and it is possible that your health outlives your money !
Your post–retirement years also pose additional considerations, taking into account risks related to:
- Longevity – living too long without available funds
- Consumption – having to dip into your capital for living expenses
- Inflation – the ongoing increase in the cost of living
- Market volatility – we cannot predict how our investments will perform
- Medical costs – medical inflation is higher than traditional inflation
YOUR SOLUTIONS
Your investment and savings options
Available funds to provide for emergency expenses, education funding, acquiring assets, provision for retirement income and post–retirement medical funding. A summary of available options to be aware of and consider:
Generally the safest, but lowest returns via either bank savings accounts or money market investments
- Collective Investment Schemes
- Your invested funds are easily accessible with direct investments in portfolios (both local and offshore)
Allows for investment in listed shares via a broad range of investments via a single platform
A contractual savings plan usually taken out with a life assurer
- The minimum investment period is 5 years when the returns are tax–free
- This is a disciplined form of saving
- Large corporations / parastatals / local authorities / governments
- Debt instruments against funds borrowed from investors
- Set interest rate for the investment period
- Maturity periods are either 2, 3 or 5 years
- Inflation–linked bonds
- Pay floating interest set above the inflation rate
- Interest is adjusted every 6 months in line with CPI (Consumer Price Index/Inflation Rate)
- Maturity periods are 3, 5 or 10 years
Medium to high risk and includes rental returns and / or capital growth
Highest risk where investors share in actual profit or loss of companies
The trade in foreign currency markets
What's the difference?
INDIVIDUAL Retirement Annuities
- Up to 15% of your non–retirement funding income may be claimed as a tax deduction for RA contributions
- A pension can only be drawn once you reach age 55
- On retirement you can withdraw up to one third of the investment amount as a lump sum and the balance must be used to purchase a pension income (known as an annuity)
GROUP RETIREMENT ANNUITIES
- Allows business owners to provide their employees with a tax–efficient retirement savings without any portfolio administration or additional costs.
PENSION FUNDS
- Stand–alone company funds to provide retirement benefits for employees
- Up to 7.5% of your basic pay is allowed as a tax–deductible contribution
- On retirement, you can withdraw up to a third of the investment amount as a lump sum and the balance must be used to purchase a pension income
- Tax on pension funds is at your marginal rate of tax
UMBRELLA FUNDS
- These pension funds are not stand–alone, but grouped together under one assurer with other funds
- The benefits are to reduce administration costs and fees and alleviate responsibilities on trustees
PRESERVATION FUNDS
- In order to preserve your retirement savings should you leave a job
- Investment benefits from either pension or provident funds
- No further contributions are allowed and 1 withdrawal prior to age 55
What is an annuity?
With RA’s and pension funds, you will have options with regard to the nature of your pension income, better known as an “annuity”. Annuities form the basis as to how your pension income will be paid following your retirement and there are options on these available for you to decide upon:
Guaranteed (life) Annuity
- Provides a known income until your death (and your spouse’s if applicable) and offers protection against the risk of longevity and investment returns.
- You can chose the level at which your annuity escalates when you die. No capital will be paid to your heirs (your capital dies with you)
- Males generally receive higher incomes as their life expectancy is shorter.
- You can buy a guaranteed annuity (eg: for 10 years) – if you die within that period, the annuity continues to pay your heirs for the balance of the guarantee period.
Living Annuity
- An investor will be exposed to investment risks and returns.
- Allows you choose where to invest your retirement savings and how much of those savings you want to withdraw each year.
- Your selected income ranges from 2.5% to 17.5% of the capital value each year.
- Beneficiaries can be nominated.
The major risk is that the capital may not sustain the income you need because of high inflation, poor investment returns or living longer than you expected.
Differences between unit trusts and endowments
| UNIT TRUST | ENDOWMENT | |
|---|---|---|
| TAX | Taxed at marginal rate | Tax efficient |
| INTEREST AND CGT | Exemption can be used | No exemption |
| ACCESSIBILITY | Funds readily available |
Must commit to at least 5 years (early withdrawal penalty applies) |
| CESSION FOR A LOAN | Not allowed | Can be ceded |
| BENEFICIARIES | Cannot be appointed | Allowed |
| PERFORMANCE FIGURES | Available daily | Periodic reporting |
