Generally speaking, Retirement planning is the planning of your finances for the period of life after youstop working. This process involves:
- considering at what age you want to retire;
- determining capital needed to cover living expenses and your lifestyle;
- determining capital available at retirement from retirement products and investments
- and determining how much needs to be saved to meet your retirement goals.
Retirement planning is more than simply contributing to a retirement product, it involves understanding the tax laws, time value of money calculations and investment strategy. Each person’s situation is unique and retirement planning isn’t one standard plan for every person, for example, not everyone is offered a pension by their company, and we all have different incomes and lifestyles.
The South African Treasury conducted a survey and found that 94% of South Africans do not make sufficient provision to enjoy a comfortable retirement and as a result they need to continue working in their retirement years or depend on Government pension or family members for support.
The current retirement products on the market are pension funds, provident funds, preservation funds and retirement annuities. Changes in legislation that are proposed to start in March 2015, seek to align retirement funds so that they operate and are treated in exactly the same way. The Government’s major concern is that South Africans are not saving enough for their retirement and that there is need for a stricter regulatory framework to be implemented by the Financial Services Board (FSB) through training and reinforcement of good governance principles as many of the trustees may lack the competence and necessary skills to make investment and management decisions consistent with the best interest of beneficiaries.
Various key stakeholders in the industry directly and/or through National Economic Development and Labour Council (NEDLAC) are currently working on finalising the legislative framework for retirement reform and the Association for Savings & Investment South Africa (ASISA) is also facilitating consultations in order to formalise the inprinciple agreement to lower costs in the retirement industry as well as improve fund disclosure. Treating Customers Fairly (TCF) principles will also be applied to retirement funds.
CURRENT VS PROPOSED RETIREMENT FUNDS
A pension or provident fund is a fund established by a company, governmental institution or union for the benefit of employees at retirement, therefore for a pension or provident fund to exist there needs to be an employer- employee relationship but for an retirement annuity to exist it does not require an employer-employee relationship and can be opened on an individual basis. A retirement annuity is a tax efficient investment vehicle for individuals. The primary target market are individuals who do not belong to a pension or provident, are self employed and for those who would like to save more towards their retirement. Implementation of a mandatory retirement system in South Africa is underway for both employers and their employees as well as aligning all retirement funds to be treated in the same way.
With a retirement annuity and pension fund there will be a tax deduction on contributions whilst there are no tax deductions on a provident fund for the employee. To promote savings, the deductibility of contributions to pension funds, retirement annuities, provident funds and employer contributions that will constitute as fringe benefits will be increased to 27.5% of the greater renumeration or taxable income (excluding retirement annuity or lump sum income) subject to annual cap of R350 000.
On resignation or retrenchment for a pension or provident fund you may either take your funds as a lump sum and pay tax or transfer them to your new employer group or another approved fund such as a preservation
fund which will allow you a once off withdrawal before retirement but for an R.A you can’t take the funds as a lump sum before retirement at age 55 unless the funds are below R7 000, you formally emigrate or you
become permanently disabled. As a plan on improving preservation, it has been proposed that it should become mandatory to preserve retirement savings until you retire with a few exemptions for the unemployed, low income earners and those who will be aged 55 by March 2015.
On retirement with a pension fund or retirement annuity, 1/3 can be taken as cash and 2/3 should be used to purchase a living annuity or conventional annuity but with a provident fund you may take the entire benefit in cash. If the fund value is below R75 000 though for a pension or retirement annuity you are allowed to take the entire benefit in cash. With the recent proposed changes, all retirement funds will be subject to same annuitisation requirements and the minimum fund value that can be taken fully in cash will be increased to R150 000.The Minister in his 2014 Budget Speech announced the increase of the tax-free lumpsum amount paid out of retirement funds at retirement to be increased from R315 000 to R500 000, benefiting low-income members who did not benefit from deductible contributions.
The Retirement reform proposal which is aimed at improving retirement planning in South Africa if properly implemented can be said to be the ‘doorway’ or success of a happier retired generation.
TATENDA ERICA MUPUNGA,
Precept Wealth Solutions