No matter what age you plan to retire at, if you’re a self-employed entrepreneur or a freelancer, your pension planning is entirely your responsibility. Are you saving enough in long-term investments to maintain your lifestyle after you retire, without having to earn extra income? If you’re already over 50, the question is especially urgent.

To find out if you’re properly prepared for retirement as a self-employed individual, ask yourself the following:

• How far are you from retirement?
• Do you know whether your current retirement savings contributions, values and potential growth will be enough to meet your needs in retirement?
• How much can you afford to invest in pension or provident funds or other retirement savings vehicles every month? 
• Can you adjust your budget to save more if needed?
• How much liquidity or access to capital do you need?
• What is the best use of the different retirement and savings vehicles for you?

A financial adviser can explain all the options available and help you find the best one for your unique circumstances. Consider investing in alternative retirement savings vehicles that offer the financial flexibility and tax benefits that previously would have come only with participation in an employer pension fund. 

What retirement planning options do the self-employed have?

Retirement annuity

A retirement annuity (RA) is basically a personal pension plan. You can take out an RA yourself, so it is a great option for people who don’t have access to retirement benefits via their employer, or the self-employed, or anyone who wants to supplement their retirement savings. With an RA, you can choose the underlying investments yourself. The amount you can contribute and be entitled to subtract from your taxable income is subject to the regulatory limits for retirement funds, which is 27.5% of taxable income for the self-employed, subject to a cap of R350,000 a year. 

As with pension funds, you must invest at least two-thirds of your lump sum at retirement in an income-producing annuity. If the total amount in the fund is less than R247,500, however, you can take the full amount as a cash lump sum, subject to tax deductions. You can make monthly contributions to an RA as you would to a pension fund, usually via debit order. You also have the option to make a lump-sum contribution, or ad-hoc contributions.

You can choose the funds you want to invest in within the limits set out by the retirement fund regulations. These funds are called Regulation 28 funds. In addition, RAs have the following advantages:

• There is no income tax or capital gains tax on the investment return earned in an RA.
  
  
• Contributions made to an RA may qualify for an annual tax rebate.
  
  
• Invested funds are protected from creditors.
  
  
• They allow for estate planning, as retirement money does not form part of your estate. If you structure your RA properly, you can avoid estate duty tax and executor’s fees on your retirement investment returns. Although the trustees of the RA will take your wishes into account, they must pay out the money according to the legislative requirements. For example, they must make sure that those who are financially dependent on you receive the money. This can take up to 12 months.
   

Provident fund

Note that provident funds are not available to self-employed individuals unless you are the owner of the company and decide to set up a provident or pension fund for staff. So, if you’re not in that situation, this section doesn’t apply to you.

Before legislative reforms introduced on 1 March 2021, there were differences between a pension and provident fund in terms of when you could access your capital and how much of it you could access at one time. In terms of the new retirement planning reforms, the tax treatment and annuitisation requirements of provident funds are more aligned with those of pension funds. 

While a provident fund is now more like a pension fund, prior to 1 March 2021 it differed in that when you retired, you could take the entire sum as cash, which you’d be taxed on. You wouldn’t need to purchase an annuity. Now, provident fund members are allowed to take a third of the benefit as a lump sum and must use the remaining two-thirds to buy a pension that provides a monthly income. There are vested rights for those who were members prior to this change, who may take a higher percentage in cash as a result.
 

Preservation fund

If you are working full-time and you’re planning to leave your employer and launch a career as a freelance contractor, you might already be contributing to your company’s pension or provident fund. A preservation fund allows you to preserve your retirements savings from your employer’s fund once you become self-employed. Alternatively, you can leave the money in your employer’s fund but may not make any further contributions to it.

A preservation fund is a retirement fund specifically designed to receive lump-sum benefits from a pension or provident fund. While the funds are in the preservation fund, the capital continues to grow tax-free. You can make one partial or full withdrawal from the fund before you reach the age of 55, and only access the balance after you turn 55. The same rules apply as those for a pension or provident fund, depending on which vehicle you are preserving.

You can transfer your savings to a preservation fund tax-free, but you cannot make additional contributions. Therefore, it’s important to add further retirement investments to your portfolio when you go freelance and to continue contributing to them throughout your career.
 

Tax-free fixed deposits

A tax-free fixed deposit may be an option to consider, but only if you are planning to retire within the next 5 years. It guarantees your initial capital investment and offers an agreed rate of return – and you won’t be taxed on dividends, capital gains or interest earned. Growth on your savings capital won’t be affected by additional monthly fees, and your money is easily accessible after the fixed term. However, this is not an ideal option for the long term, as it typically doesn’t deliver enough growth (compared to more prevalent, higher-equity retirement investments) over longer periods.

Current legislation allows you to save up to R36,000 a year and R500,000 in your lifetime in tax-free investments. Bear in mind that if you withdraw money from the tax-free deposit to live off during retirement, you can’t replace these contributions. Any new contributions will be added to previous contributions, even if you’ve withdrawn a portion of them, and the total must not exceed your lifetime limit. 

If, however, you are more than 5 years away from retirement and looking for a more diversified retirement investment option that still grows tax-free, a tax-free investment account, for example a high-equity unit trust, may be the way to go. 

A qualified investment adviser is the right person to give you advice on this at any age if you are freelancing or contracting. Nedbank offers a range of tax-free investment options, and advisers who can help you choose a type and fund according to how far you are from retirement.
 

Unit trusts

Unit trusts are another reliable and tax-effective way of investing for your retirement as a freelancer or self-employed person. There are no annual or lifetime limit on contributions, and you have the flexibility of adding or withdrawing funds as needed. However, this money is subject to dividend tax, tax on any interest or income earned by the funds and capital gains tax on sale (if applicable). There are a wide range of investment portfolios and asset classes to choose from, so you’d be wise to consult an investment adviser. 

You can also include tax-free unit trusts in your portfolio, but remember that the annual limit of R36,000 and lifetime cap of R500,000 apply to your total contributions, no matter how many different tax-free products you invest in, and there are tax penalties for overcontributing. You should invest any amounts over those limits in taxable unit trusts, in which all income or revenue generated from the assets are subject to income, dividend and capital gains tax. 

All these retirement planning and savings options are geared to the flexibility and tax requirements that self-employed people need to factor into their investment choices. A financial adviser can help with assessing what is best for you, and they may advise that only one retirement investment is not enough to meet your needs. 

Nedbank can help you plan a worry-free retirement, from calculating how much you will need when you retire to how to invest wisely in the right retirement vehicles to save that amount.