Start early to make extra provision for your life after retirement

Paul McKillen

Paul McKillen

People should seriously think about supplementing their pension fund contributions with private investments.

Retirement annuities (RAs) offered by life insurance and unit trust companies are among the most popular and tax efficient ways to do this.

Unit trusts and endowment policies could also be used to save for retirement.

Before making a choice about the savings vehicle to use, it is important to understand the tax, liquidity and investment risk implications of each vehicle.

In a nutshell, RAs enjoy favourable tax treatment compared with other vehicles. Subject to legislated limits, your contributions to an RA are tax deductible.

In addition, the investment returns that you earn in the RA are not taxed, so you enjoy the full benefit of income and capital growth on your investment.

Over time, this can make a huge difference to the retirement proceeds you finally receive.

By contrast, unit trusts and endowments do not benefit from the generous income tax concessions granted by the South African Revenue Service to retirement annuity products.

Your contributions to these vehicles are generally payable from your after-tax income, and the investment returns earned on your savings are taxed. The rate of the taxation depends on the vehicle you have chosen.

However, there is a price to be paid for the tax benefits available on RA products, and this price is reduced liquidity - because of the preferential tax treatment.

The government requires that your money remains invested in an RA or preservation fund until you retire, or at least until the age of 55 - so you cannot access your savings before retirement.

Furthermore, you are required to invest at least two-thirds of your RA proceeds into buying a lifetime pension.

So, with RAs, you are restricted in terms of when and how you can access your money.

In comparison, unit trusts and endowment products offer greater flexibility and liquidity, and there are no constraints on how you can use the proceeds of these investments. Remember that the tax treatment of unit trusts and endowments is far more severe.

Each individual's needs are different and people are advised to consult a professional financial advisor before making a decision on which vehicle to use when thinking of retirement.

The bottom line is unless you are among the less than 10percent of South Africans who manage to retire with enough money to live on comfortably after retirement, you should consider making extra provision for your retirement as soon as possible.

l The writer is product development actuary at Metropolitan