Retirement Planning in South Africa
Retirement planning is a long-term strategy to ensure you have enough put by to maintain your lifestyle when you stop working. Read our guide on retirement planning in South Africa to learn how you can secure your future.
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Planning for retirement is essential for creating a secure financial future when you stop working.
With so many other things to worry about, you may wonder, 'why do I need a retirement plan?', especially if you are young. But the truth is, rising living costs, a fluctuating economy and increasing life expectancy in South Africa make it critical to start planning early.
This guide covers the fundamentals of retirement planning. We explore the options, strategies and steps to help you achieve financial freedom in retirement.
Why do I need a retirement plan?
A well-structured retirement plan helps ensure you have enough saved to retire comfortably. Unfortunately, many South Africans are not thinking about the future.
First National Bank's Retirement Insights Survey revealed that almost half (48%) do not have a retirement savings plan. Those with a retirement plan underestimate how much they will need once they reach retirement age.
Experts often suggest you need around 75% of your final annual salary to maintain your lifestyle. However, separate data found the average South African can replace just 31% of their income with retirement savings. Only 9% could replace 80% or more of their income.
By focusing on retirement planning now, you can make sure you are financially prepared for the future.
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Retirement planning options in South Africa
South Africa offers various retirement savings options. Each offers distinct benefits, tax incentives and withdrawal rules. Here are some of the most common options:
Pension and provident funds
Many employers offer these types of funds. Contributions are tax-deductible, and the funds grow tax-free until retirement. A provident fund allows you to take a third of the benefit as a lump sum. The remaining two-thirds are used to buy a pension, providing a monthly income during retirement.
Living annuities
These offer flexibility, allowing you to choose your annual withdrawal rate and control investment choices. At the same time, there is a risk of losing money if your investments underperform​ or the withdrawal rate is too high.
Life annuities
These provide guaranteed income for life, regardless of how long you live. Life annuities offer security but lack flexibility. Once set, you can't change the payout.
Retirement annuities (RAs)
A retirement annuity (RA) is a private retirement savings account. Contributions are also tax-deductible up to a specified limit.
RAs give you more options and flexibility than pension or provident funds. For example, you have more investment options. However, there are limits as set out by the fund regulations.
These retirement accounts are a good option for those who are self-employed or do not have an employer-sponsored pension. Even those with an employment pension can benefit.
In South Africa, there are two main types of annuities to consider:
Preservation funds
If you leave a job before retirement age, you want to ensure that the money you built up in a pension or provident fund is not lost.
Think of a preservation fund as a centralised savings pot. These funds allow you to transfer pension or provident funds where they will continue to grow.
Once you reach 55, you can access the balance. Before the age of 55, you can make one partial or full withdrawal.
Tax-free savings accounts (TFSAs)
Another product to consider as part of your retirement planning strategy is tax-free savings accounts (TFSAs). TFSAs allow tax-free investment growth and can complement other retirement savings.
While Regulation 28 restrictions do not bind them, TFSAs have annual and lifetime contribution limits.
Tax benefits and considerations
Understanding tax and how it can affect your retirement savings is essential. This can help you maximise your returns and optimise your retirement income.
Tax-deductible contributions
Contributions to pension, provident funds and RAs are tax-deductible up to 27.5% of your income. There is an annual cap of R350,000. This helps lower your tax bill and encourages savings.
Tax-free growth
Savings within retirement funds grow free of capital gains and dividend taxes, allowing for compounding growth. Pension income is taxable at retirement. However, foreign pensions, such as UK pensions, are exempt.
Lump sums
You can take a third of your retirement fund as a lump sum payment. The remaining two-thirds are paid as an annuity. Be aware that all lump sums from a fund are subject to tax on a cumulative basis.
Retirement planning vs estate planning
While retirement planning and estate planning are two different things, there is some crossover.
Your retirement savings can be part of your legacy, providing financial security for loved ones. Estate planning allows you to pass down assets, like retirement savings or property. It helps avoid unnecessary taxes or fees on inheritances.
Tax rules can be complex, so seeking professional advice is best. Working with a financial adviser can make this process more efficient and straightforward.
Retirement planning in South Africa with Holborn
Retirement planning in South Africa involves more than simply saving and investing. It's about proper financial planning and building a strategy that fits your lifestyle, manages risks and ensures stability.
Remember, it's always best to start early, but whatever stage you are at, professional advice can help you make the most of your retirement planning.
Holborn Africa is a leading, award-winning financial service provider. Our expert financial advisers offer a range of retirement planning services tailored to your needs and financial goals.
Start planning for tomorrow, today. Book a free, no-obligation meeting to learn how we can help you.
Our Retirement Planning Services
Provident Pension Fund
Provident pension funds provide a tax-efficient way to save for retirement.
Annuities
Annuities allow you to create a secure income that lasts the rest of your life.
UK pension transfer
Transferring your UK pension to another scheme or provider could unlock your retirement savings potential.
UK state pension
The UK State Pension is a regular payment made by the UK government once you reach a certain age.
UK pension
UK pensions provide a tax-efficient way of saving for retirement and planning for your future.
Frequently Asked Questions
It's best to start saving as early as possible. Regular contributions from a young age can compound over time, giving your money the best chance at growth. However, it's never too late to increase contributions or find suitable investment options to make up for lost time.
