18 July 2020

The 12-Year Retirement Gap You Can Close

The 12-Year Retirement Gap You Can Close
Many South Africans worry about outliving their retirement savings, and with statistics showing that people are living longer, this is a genuine concern. But according to Tiaan Herselman, from Old Mutual Wealth, you can combine two smart savings options: a Retirement Annuity (RA) and a Tax-Free Investment (TFI), to extend your retirement income by as much as 12 years.

Why this Combination Works

Retirement Annuities (RAs):

  • No tax on interest, dividends, or capital gains while you remain invested.
  • You can claim a tax deduction of up to 27.5% of your income (capped at R350,000 per year) on contributions to retirement funds (RAs, pension, or provident funds).

Tax-Free Investments (TFIs):

  • TFIs let you invest up to R36,000 per year, capped at R500,000 over your lifetime, with no tax on growth, dividends, or capital gains tax.
  • Unlike RAs, TFIs aren't limited by Regulation 28, so you can invest in higher-return options like offshore equities or property.

Two Scenarios, One Goal: R20,000/month at Retirement

Let’s compare two 28-year-old investors saving R5,000/month until they retire at 60, with contributions increasing 5% annually with inflation:

Scenario 1: RA Only

The entire R5,000 goes into an RA, increasing with inflation.

Scenario 2: RA + TFI

R3,000 goes into a TFI (until the R500,000 limit is reached), with the rest going into an RA. The TFI investments are in offshore unit trusts for higher returns.

Behind the Numbers

These scenarios assume:
  • An average return of 9.5% p.a. on the RA and 11% p.a. on the TFI.
  • The investor does not reinvest the tax refund from SARS (though ideally they should).
  • At retirement, savings are converted into a living annuity, starting with a 2.5% withdrawal, topped up by the TFI. If there's no TFI, withdrawals increase annually up to the 17.5% legal limit.

The Results

Scenario 1 (RA Only): Income of R20,000/month after tax (in today’s money) lasts until age 77, when reaching the 17.5% legislative income limit on retirement funds.
Scenario 2 (RA + TFI): Income of R20,000/month after tax (in today’s money) lasts until age 89, when the TFI is depleted, and the 17.5% legislative threshold on retirement funds has been reached.

What this Means for YOU

Using both an RA and a TFI can give you 12 extra years of retirement income. It also offers more investment freedom and higher potential returns, helping you achieve a sustainable retirement at affordable levels over the course of a normal working life.
* Exceeding these limits will lead to a 40% tax penalty applied on excess contributions.
With the right plan, your retirement can be everything you hope for. Let a CERTIFIED FINANCIAL PLANNER™ help you get there. Contact us today!
SOURCE: Tiaan Herselman, Old Mutual Wealth