FINANCIAL INFORMER – Q1 2020

RA RA Rasputin, Taken on trust.

 

Vanguard Financial Informer - Q1 2020
Vanguard Financial Informer - Q1 2020

 

Much like the infamous Russian, RA’s may be viewed as both good and bad. However, unlike Rasputin, RA’s are for the good and the only “bad” are the rules that you have to obey and are there for your protection. Essentially, the good far outweighs the bad and when the day comes and it’s time for your retirement you will be relieved that you played by the rules.

 

There are a number of ways to save and a retirement annuity fund, is one of the potential investment tools which offers a tax efficient way to save towards retirement.

You can invest lump sums or make regular contributions into your own investment portfolios within a retirement annuity. The earliest age you can retire from the fund and make withdrawals is 55 years old.

When you retire

At retirement you can take up to one third of your fund value in cash, subject to taxation, and the remainder can be used to either invest into a living annuity or purchase a fixed annuity, to pay your-self an income at retirement.

When choosing your investment portfolios for your retirement annuity, it is important to understand that a retirement annuity, as well as any other pre-retirement investment vehicles, follow Regulation 28, which limits the amount of exposure in certain asset classes. For ex-ample, you cannot have more than 75% in equities (includes local and offshore equities). This is to decrease risk for the investor and help protect and diversify portfolios

What happens to your funds when you pass on?

The trustees of the retirement annuity fund will allocate your fund value to your dependents and nominated beneficiaries as is required by law. You can nominate beneficiaries for consideration with a retirement annuity and this nomination will assist the trustees of the fund in allocating the funds on your death.

Typically, people whom are financially dependent on you will receive funds. Always ensure that you list all your beneficiaries for your retirement investments or contact your adviser for the necessary forms to have them listed.

Why save towards a retirement annuity?

Some of us might already have pension or provident funds which we use to save towards retirement and it might seem like you and/or your employer are making sufficient contributions, but in many cases this alone might not be enough to retire on, depending on your specific needs.

When your contributions for your pension or provident funds are calculated, it is based on your pensionable salary and not your cost to company. The rule of thumb is that if you save 15% of your salary over 35 years, you could potentially receive 75% of your salary as a pension, as long as you received reasonable investment returns

The problem is that your pensionable salary is usually only about 70% of your cost to company (depending on the company you work for). For example, if your monthly package is R15 000, you would need to retire on the equivalent of R11 250 (75%). However, your pensionable salary which your contributions are based on, is less at R10 500 (R15 000 x 70%). If we use the general rule of thumb it provides a pension income of only R7 875 (R10 500 x 75%), which is much lower than you might have thought.

You can make up the shortfall by investing additional contributions of your ...

FINANCIAL INFORMER – Q1 2020