Question:
I currently contribute to a retirement annuity to save for my retirement. Is this the best way to save, as I do not contribute to a workplace pension fund. What other safe options are available to ensure that I am appropriately covered?
Answer:
Thabang,
Retirement funds (pension, provident or retirement annuity funds) are the optimal way to save for retirement, as they provide important tax advantages (tax-free contributions, investment returns and lump sum payments) and they foster a savings discipline based on a) regular mandatory contributions and b) restricted access to savings.
If you do not have access to a workplace fund (pension or provident fund), then a low-cost retirement annuity is next best option. The low-cost aspect is critical as high investment fees quickly erode the the tax advantages of a retirement annuity. Unfortunately, underwritten retirement annuities issued by the big life assurance companies often come with these high fees. Also many come with draconian surrender penalties if you are unable to keep up your agreed contribution, meaning you lose a big chunk of your savings at that point. You should therefore consider some of the new-age retirement annuities that charge much lower fees, and no surrender penalties if you can longer afford to contribute.
There are other savings options, outside the retirement fund system, but they do not confer the same tax advantages. And "safe" is a vague concept. If you put your money in the bank, you will be taxed on your interest income (above the exempt portion of R22 800). You will not earn much of a real (after-inflation) return before tax, and after tax, the value of your savings will effectively decline. Your money should be safe, but not your retirement as your savings are not growing in real terms. Alternatively, your own share portfolio may provide you with a high real return over time, but you may not feel safe with the intermittent volatility, or with your mix of shares (level of diversification). Or you choice of unit trust is poor, based on the fees charged and the returns earned.
In deciding on what is "safe", consider the following:
- Are my service providers regulated and registered with the FSB?
- Does my financial adviser have my best interests at heart?
- Is my investment vehicle transparent on fees, returns, investment style and asset allocation?
- Are my gross investment returns likely to approximate the market return over time?
- Do my service providers charge low fees?
- Does my investment portfolio provide broad diversification?
- Does my investment vehicle come with strong governance (independent trustees)?
- Is the asset allocation appropriate for my age and expected retirement date at every point?
