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At some stage in our lives, we all have hopes and dreams about the things we would like to have in life and the things we would like to do once we’ve retired and have time to enjoy the finer things in life. That in itself is great, but for many South Africans their dreams come to a dramatic ending when they retire and they realise that they haven’t made adequate provision for the future.
To make sure you are financially comfortable in your golden years, it is critical that you build an investment that is large enough to support you in your retirement. Experts say that we need between 8 to 10 times our annual salaries as capital in order to be able to afford a pension that provides an income that will replace about 60% of the salary we earned before retirement.
Also remember the following golden rules:
- It is never too late to start making regular monthly savings (outside of your employer fund).
- Every effort should be made NOT to take your retirement savings as cash when you change jobs.
- Save more money in a way that makes you pay less tax whenever possible (the less tax you pay the more money you have to save).
- Invest your money wisely and obtain professional financial advice from an approved financial advisor.
- Make sure your investments keep pace with inflation.
DID YOU KNOW?
Inflation is the measure of the ongoing increase in the average price of all goods and services over time. Inflation eats away at the value of your money. This simply means that fewer goods can be bought with the same amount of money as time goes on.
Retirement annuity funds are almost identical to pension funds. People may invest in them as individuals and they offer tax deductible contributions. If you do not enjoy tax relief on your contributions you need to keep track of all such payments. The tax free portion of whatever cash you take at retirement will be increased by this amount.
At retirement, the member may take a maximum of one third in cash (some of which may be tax free) and use the balance to invest in a pension for life. Unlike other insurance policies, these cannot be cashed in before age 55, nor can they be used as security. Effective from 1 March 2009 withdrawals are permitted from retirement annuities if you emigrate. Members are required to make their own investment choices and these choices are mainly unit trust funds, or specific portfolios provided by the institution concerned.
These are very like unit trusts (collective investments) but are offered for fixed periods. Any money you put into an endowment is an after-tax contribution and the proceeds are free of Income Tax. You still have to choose your own investment portfolios which are usually unit trusts. Instead of the tax on earnings being for your account the insurance company pays it. So unless your tax rate is very high there is not much advantage over unit trusts. These products are exempt from Capital Gains Tax. You need to check that the costs of an endowment policy are not higher than those of unit trusts. Higher costs mean less for you. You may withdraw at any time but may pay penalties.
Unit Trusts (Collective Investments)
Unit trusts are investors clubs that offer the power of collective investing to allow small investors to invest in a wide range of diversified investment portfolios. They have no special tax status. You pay after tax money in and can cash your investments at any time. These trusts pass all income on to you directly. They can pay you the cash received from interest and dividends or you can ask them to reinvest these earnings. Reinvesting means that you will get more units and so grow your investments.
The value of a unit trust will be the underlying value of the assets that make it up. If the assets drop in value, the unit price will be low, if the asset values rise the unit price will increase. Unit trusts tend to have lower costs than endowment policies. Investors may invest lump sums in unit trusts, or they may contribute every month. Your gains are subject to Capital Gains Tax.
Exchange Traded Investments
An exchange-traded investment is one where an investment company is quoted on the Johannesburg Stock Exchange (JSE) and investors buy shares in that company instead of buying into a unit trust, or a share portfolio. The advantage of this investment is that all income is in tax-free dividends, and the price of the shares can be seen every day on the JSE. Unlike most listed shares, a minimum of 100 is not required for this investment, so people with relatively small amounts of money can invest regularly.
The best-known exchange traded investment in South Africa is the Satrix 40, which is an index fund. Satrix 40 illustrates the concept of the index fund very well. Instead of having a fund manager who chooses which shares to buy, and in which proportions for a portfolio, the index fund buys shares strictly in the proportions that they occur in the market. Minimum investment in Satrix 40 is R300 per month or R1, 000 as a lump sum. Costs are less than those of unit trusts.
Investment is all about risk and return. Your appetite for risk will play a role in the type of investment product you select and the return you will receive. It is important to decide for how long you intend to invest before choosing the type of investment. If you are building up a crisis fund you don’t want the value to move up or down in case it is down at the time you need your money. If you are saving to build up money to help you retire more comfortably you may have many years to go and then investing at least some of your money in shares is possible. This means that you can get very good long term growth even though there will be times when values will drop. For this, it is important to ignore the short term volatility of markets. It is advisable that you obtain financial advice from an accredited financial advisor before electing a savings product. A financial advisor can assist you in determining your risk profile. To find a financial advisor go to www.fpi.co.za.