Saving for your retirement can be confusing and frustrating if you’re not financially minded. The danger this poses is that you might switch off whenever your pension is mentioned, hoping that the experts know what they’re doing and that you’ll have enough to retire on.

Unfortunately, hoping isn’t enough to ensure that you’ll live comfortably through your retirement. By the same token, you don’t have to be a financial genius to live comfortably for the rest of your life. Investment firms and specialists have done the hard work for you by creating retirement funds that allow you to save regularly toward a future goal that’s often decades away.

Let’s have a brief look at your options when considering your retirement savings, including when you change jobs:

Tax benefits of saving for your retirement

One of the defining characteristics of a retirement savings product is a tax deduction for qualifying contributions you make to an approved retirement fund.

You’re allowed to invest as much as you like for your retirement, but the deduction of your tax contribution is limited to 27.5% of your taxable income, up to a maximum of R350,000 per year. The benefit here is that income tax on your salary is calculated only after the monthly pension contribution has been deducted, leaving you with more cash than someone not contributing to a retirement fund.

Say, for example, you’re earning R25,000 a month and saving the full tax-deductible amount available to you: R6,875. You’ll be taxed only on income of R18,125. Saving as much as this every month would take some doing, but even if you saved only the ‘recommended’ 15% of your salary, that would lower your taxable income to R21,250.

These tax savings can go a long way to easing the pressure on your monthly budget.

Regulation 28 prescribes what assets can be owned by retirement funds. This regulation dictates how much of a fund can be invested in different types of investment assets. The goal is to reduce the risk in these funds and lower the chance that pensioners’ life savings will be lost. So, make sure your fund complies with Regulation 28.

And remember, although you receive tax benefits now, you will be taxed on your taxable retirement savings when you retire and access your pension.

A company pension or provident fund

This is the most common option if you work in a large or established business with hundreds or thousands of employees. Traditionally, company pension and provident funds haven’t typically offered much choice over where your money is invested. You simply had to go along with the trustees on what they believed was the best investment decision.

Thanks to the modernisation of financial products, some company-provided funds now allow you a degree of choice so that you can match the fund to your personal risk appetite. When you’re closer to retirement, for instance, and plan to cash out a large portion of your retirement savings or purchase a guaranteed annuity, you want a more balanced fund instead of one that’s heavily invested in listed stocks. The highs and lows of stock markets are good when you have time to regain your losses, but you don’t have the luxury of time when you plan to cash out a large portion or purchase a guaranteed annuity.

An important restriction on these funds is that you can withdraw only up to one-third of your savings as a lump sum at retirement (although provident funds started before a change in the law in March 2021 still have vested rights that allow you to withdraw more). The remainder must be invested in an annuity that pays you a monthly income. The pros and cons of drawing a lump sum are discussed in this article.

DIY retirement saving with retirement annuities

Retirement annuities (RAs) are ideal if your company doesn’t offer a retirement fund or you’re self-employed, as you get the same tax benefits up to the threshold of 27.5% of your remuneration or taxable income. Any additional saving contributions above this threshold do not qualify for tax deductions. However, you can use those non-deductible contributions to reduce the tax payable on your lump sum at retirement or any annuity taken. RAs are also bound by the same rules on lump-sum withdrawals at retirement and can only be withdrawn after you turn 55.

On the plus side, RAs offer you a variety of risk profiles, investment themes, industries and countries to invest in. As always, it’s best to make financial decisions in partnership with an accredited financial adviser, especially decisions that impact your retirement.

Preservation funds

A preservation fund is a retirement fund designed to preserve your pension or provident fund benefits when you are retrenched, dismissed or when you resign. Whenever you change jobs, your retirement savings generally follow you, although it’s also possible to leave your savings untouched in your ex-company’s pension/provident fund and then start contributing to a new fund.

However, most people decide to reinvest their savings in a preservation fund, or they cash out their savings. In this blog, we discuss why the second option is seldom a good idea.

By shifting your retirement savings to an approved preservation fund you avoid any taxes at this stage, and you allow your savings to continue growing until you reach retirement age – when your tax rate will be lower. When that time comes, you’ll be able to withdraw a portion or transfer your funds into an annuity product just as you do with a pension or provident fund.

Whichever route you choose, the most important thing is to have a plan for how much you need to save for your retirement and to stay committed to that plan. As your goals change, so may your plan, which is perfectly fine – provided you remain focused on your end goal.

Preparing for your retirement is a life-long pursuit. Get your journey off to the right start by speaking to a certified financial planner able to give the right advice for your unique circumstances.

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