First published in Estate Living magazine & online
There are many ways to invest for your retirement years and although you may contribute to a compulsory company pension or provident fund you should most definitely not be content with just that. A terrible reality is that only around 6% – 10% of South Africans are on track to retire comfortably (different surveys give varying
results) and the mainstream idea of contributing to a single fund needs to be reconsidered.
Tax Free Savings Account
If you’re aged 40 or younger and are able to contribute the maximum annual amount of R33,000 to a Tax Free Savings Account (TFSA) each year then this could be a great way to supplement your retirement fund. The lifetime contribution limit of R500,000 will be reached in the 16th year of investing and the tax benefit will already become evident in around the 6th or 7th year depending on the growth and other investments you may have. Considering that the first R23,800 of your overall interest earned in a year is tax-free, any interest above that is taxed at your current tax rate. This implies a huge saving in a TFSA especially if you leave your money untouched for 20 or more years as the compounding growth remains tax free. If you’re in one of the higher tax brackets then this will make a noticeable difference!
Another great advantage is that dividends earned in a TFSA are also exempt from the normal tax of 20% so the growth is truly tax free.
Another investment option to consider is a Retirement Annuity. Contributing to an RA will reduce your taxable income (meaning you pay less tax) but only up to the limit of 27.5% of the higher between taxable income or remuneration, capped at R350 000 per tax year. You could calculate the tax you save and then invest that too; it’s essentially “free money”.
Other good reasons to look at RA’s are that the growth on your investment is tax-free and there is also a lump-sum benefit at retirement which is exempt from tax. You will pay tax on withdrawals during your retirement but as the tax rebates, rates and allowable deductions are favorably adjusted for people aged 65 – 75 you will ultimately pay less tax.
Investing in property in order to create an income stream is a great idea but you should make sure that you understand the tax implications. Owning property in your personal capacity, a trust or in a business all have their different tax advantages and you should consult a tax expert to find the best solution based on your circumstances. If you already own property and have not consulted with a tax practitioner in the past few years then you should consider doing so to make sure that you are running things as efficiently as possible.
Gold and other precious metals
A less talked about investment option is Gold and other precious metals such as Silver & Platinum. You can purchase shares in funds that track these indexes or even buy Kruger Rands that are kept for you the investment company you use. You can of course buy actual tangible Kruger Rands or metal bullion bars from dealers such as Metcon. Seeing a physical investment and knowing that they are easily traded can add to your peace of mind.
Some things to consider are that bullion bars attract VAT whereas Kruger Rands do not and generally when purchasing one would buy at around 10% higher than the daily listed price and sell at around 10% lower. That’s how the dealers make their money. This simply means that you should hold onto your investments for a few years to make up for the initial “loss”.
Investing for your retirement isn’t simply a case of contributing a small percentage of your salary to a fund each month. Rather over-compensate and diversify your investments with a combination of tax efficient investments to ensure that you’re not one of the poor statistics in South Africa. It’s never too late to start focusing on your funding your retirement and assessing your finances holistically to better understand your current position.