Most people realise the importance of planning for retirement, but how many know exactly how to make their retirement plan work effectively? Whether it be a retirement annuity, living annuity, or investment policy, every financial product has different benefits and restrictions. The key is knowing which product or combination of products to consider as part of a long-term financial plan.
We have all heard the phrase that you are never too young to start saving for retirement, but where do you start? And more importantly, how do you ensure you optimise your income?
Gone are the days where all savings are poured into only a pension plan or retirement annuity. This is neither tax-wise nor cash-flow effective when reaching retirement. I encourage my younger clients to start contributing to both retirement products and discretionary savings as early as possible so that they have a combination of constrained and unconstrained products in their portfolios.
The benefits of a good retirement plan
Withdrawing solely from a living annuity could mean paying more income tax in comparison to withdrawing from a combination of income streams. You are also unable to make ad hoc withdrawals from a living annuity – for example, when buying a new car or booking an overseas trip. A good long-term retirement plan will include a combination of retirement and discretionary savings (your own savings that do not have the same restrictions as retirement products). This will ensure that your retirement income is designed in a tax-efficient manner, with the benefits of flexibility you need for ad hoc withdrawals.
The key factors of retirement funds
When contributing towards retirement products like a retirement annuity, pension or provident fund, the full tax benefit can be used, which is 27.5% of pensionable income restricted to a maximum of R350 000 per tax year.
On retirement you are allowed to withdraw one-third of the value of your retirement products, with the first R500 000 withdrawal being tax-free. Consider moving this R500 000 to your existing discretionary (after-tax) savings funds. The remaining retirement savings can be consolidated in a living annuity from which you can withdraw between 2.5% and 17.5% a year, or a guaranteed annuity, which will pay a specified income until your death. These income streams are subject to income tax as per the tax tables applicable to you. According to the current SA Revenue Service tax tables, the first R141 250 of your overall annual taxable income per annum for the 2023 tax year is tax-free for those over the age of 65.
Discretionary savings
Contributions to discretionary investment products are made using after-tax funds. These funds are accessible for any elective withdrawals before and after retirement, and most are 100% liquid. You can also make monthly withdrawals to supplement your retirement income, or the funds can be used for ad hoc expenses.
Discretionary funds could be subject to capital gains tax or tax on interest earned, depending on the kind of investment.
Your retirement plan should be personalised for your age, lifestyle, assets and financial goals. The long-term investment goal should always be to build a portfolio that can withstand volatility when the markets are under pressure, participate in upward trends but remain within acceptable risk parameters, while keeping tax implications in mind.
- Grobbelaar is Citadel advisory partner
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