Saving for retirement

While all three of these options qualify for the same tax benefits in terms of the Income Tax Act, there are significant differences between them.
Both pension and provident funds are offered by an employer – often as a condition of employment – with you and your employer making monthly contributions to these funds.
Retirement annuities, on the other hand, are owned by the individual, meaning you’re free to contribute to one whether you’re self-employed or you already contribute to a pension or provident fund. They also typically offer wider investment fund choices than either of the other two funds.

According to current tax legislation, and depending on your tax situation, retirement annuities offer valuable tax benefits. You pay less tax. When you pay into a retirement annuity, you’re permitted to deduct your monthly contribution from your taxable income – up to the lesser of 27.5% of your income or R350 000. This means you’re taxed on less of your income, which translates into less tax. Contributions in excess of the 27.5% limit that did not rank for deduction may be carried forward and deducted from your future taxable income, including a retirement lump sum or pension income. The growth on your investment is tax-free. The investment returns earned in a retirement annuity fund are not currently taxed.

Should you die before becoming entitled to a retirement benefit, the value of the underlying investments will be available to the beneficiaries. In accordance with law, however, the trustees of the fund make the final decision about how and to whom the benefit is to be allocated, after taking into account your dependants’ needs.

It’s important when saving for retirement to have an investment strategy that lines up with your goals, appetite for risk, and planned retirement age – regardless of what’s happening in the markets. Avoid making hasty decisions driven by fear and take advantage of volatile markets with an investment product that requires regular contributions – this allows you to buy more units when the market is down and get ahead when things start to improve. Lastly, aim to manage times of uncertainty with proper financial planning and remember that saving for retirement is a long-term strategy requiring patience and persistence – as the saying goes, ‘It’s not about timing the market, but about time in the market.’

Depending on your retirement plans, you’re likely to need at least 75% of your final pre-tax salary after retirement – bear in mind that some of your expenses will fall away once you stop working and you’ll pay less tax after 65 and even less after 75. What this means is that you’ll need to have saved at least 15 x your final annual salary in order to retire comfortably. This can be broken down over time to give you a sense of whether or not you are on track.

5 years – 1 x your annual salary;

10 years – 2 x your annual salary;

20 years – 5 x your annual salary;

30 years – 10 x your annual salary;

40 years – 15 x your annual salary.

The Wealth Bonus is a sum of money added to the Sanlam Cumulus Echo Retirement Plan at retirement. It is designed encourage disciplined saving over the life of your annuity and to boost your retirement nest egg. The more payments you make into your retirement annuity, and the greater the value of these payments over the term of the plan, the larger your Wealth Bonus will be.

Fees are charged for the administration and management of your investment and vary per product and your underlying investment. Please speak to your financial planner to make sure you understand which fees you pay and why.

No charges will be levied for changes you make to your retirement annuity after your planned retirement date. However, if you are a Sanlam Echo client, a transaction charge – currently the smaller of R300 and 1% of the fund value – will apply if you:

• Reduce or stop the recurring payment
• Take an early retirement benefit
• Terminate the plan

If you are invested in the default fund and decide to add the ability to select your own funds, a R300 charge will be applied.

You may withdraw your retirement savings from your Sanlam Retirement Annuity at any point after you turn 55. Early retirement due to ill-health or disability is treated in exactly the same way as a normal retirement. According to current legislation, up to one-third of your retirement benefit may be taken as a lump sum, which may be subject to tax. Your remaining savings must be transferred to a post-retirement income-generating solution where they will be used to provide regular pension payments. Should you choose a Glacier Retirement Annuity, we will transfer your investment at no charge and without exiting the markets. The total value of your savings at retirement will be equal to the sum of the value of your investment in each underlying investment fund, less the transaction charge, if applicable. The value of your investment in each investment fund is calculated as follows: the number of units you have in the fund multiplied by the unit price of the fund at the calculation date. Your Sanlam Wealth Bonus (a feature of the Sanlam Echo Retirement Annuity) will also be paid out to you at retirement. If you retire early, the Wealth Bonus that is added to the fund value will be lower than it would have been if you had invested until your planned retirement date.