Ask the right Guy

We get money advice from all kinds of places - family, friends and colleagues, search engines and social media. Well-intentioned as these resources may be - retirement expert Guy Chennells may just be the right guy to ask. Get his take on your most pressing queries and concerns here.

Is my money safe in my pension?

Guy Chennells: I'm frequently surprised at how often this is a genuine concern for people. If your money is with a reputable pension fund or provident fund provider, it is about as safe there as anywhere else in the world.

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The trustees who make decisions about where and how that money is invested are personally liable in case things go wrong - that means their personal assets are at risk if they make negligent or corrupt decisions. They also have to follow extremely strict and clear guidelines. The law around this is very tight, and always tightening. There are a very few headline-grabbing cases of things going wrong, but it is always in cases where the fund was not associated with a large, reputable provider.

A specific concern people seem to have is that the government can dip into their funds. But this is not the case. The government writes the laws that govern these funds, but they have no access to the funds themselves. Even in recent times where the government has spoken about wanting to promote pension funds investing in infrastructure, this is proposed by allowing greater exposure to infrastructure, not forcing it.

In short, there are many legitimate things to worry about in this life - the safety of your pension and provident fund is really not one of them!

What's better, a pension fund or a provident fund?

Guy Chennells: Good news! As of 1 March 2021, it makes absolutely no difference.

The language in this space has been confusing for years. There used to be big tax differences between your contributions to pension and provident, but those disappeared a few years ago. Then until recently there were differences in what you could do with the money at retirement, but those too were removed for new money going into funds from 1 March 2021.

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Still curious?

If you want to know what the differences were, and what they still are for people who belonged to provident funds before 1 March 2021, read on.

When you retire, a maximum of up to a third of money saved in a pension fund can be withdrawn if you wish, as cash. The rest must be invested into an annuity (something that provides income in retirement from your lump sum).

In the past, you used to be able to withdraw all the money saved in a provident fund in cash once you retired. Of course, a big cash lump sum at retirement is often not smart financial planning, as any withdrawal over R500 000 incurs a tax penalty, and you are far more likely to run out of money in retirement if you take it all upfront in cash. But the option was available.

From 1 March 2021, all provident fund money saved to that date will still be able to be taken in cash at retirement (so don't panic), but future contributions to the provident fund will now be treated like pension fund contributions at retirement.

There's one exception

One exception is for people over the age of 55 on 1 March 2021. Contributions into the provident fund that they were a part of on 1 March 2021 will still be able to be taken as cash at retirement. Again, this isn't a move that's recommended, so if you're thinking of doing this, it's best to consult with a Financial Adviser who knows your situation first.

Times are changing. Can't I just invest and stop working whenever I can afford it?

Guy Chennells: The importance of saving specifically for retirement is something the vast majority of South Africans underestimate, so let me answer your question this way. There are terrible reasons to not save for retirement. Here are some of the worst:

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  1. I don't plan to retire

    I'm afraid that in most cases, it's not your decision. Before you make up your mind on this, speak to a few retired people. You may find that very few of them really chose to retire. Most were forced out of their companies at retirement age. For some, either their own or their spouse's health failed, forcing them to put down their tools sooner than expected. Everyone retires. Only those who plan to retire, do so with dignity.

    Even if you can easily earn an income after formal employment, don't you want the freedom to choose what to do with your time in your 60s and 70s? If I choose to do something that earns an income, that's a bonus for me. If I choose not to, I'll be incredibly grateful that I made the plans necessary to allow me those options. I expect you will too.

  2. I'll start saving later

    Most people I've encountered with this reason are missing some crucial perspective that would put them off this plan.

    • If you start saving at 20 at a rate of 14% of your salary, say, you should be able to save enough to replace 75% of your salary at retirement.
    • If you wait 10 years to start saving at age 30, you'll then need to save 22% of your salary.
    • If you only start saving for retirement at age 40, you will need to save 38% of your salary.

    In other words, if you start saving as early as 20, by the time you get to 40, you will still only need to save 14%, instead of at 38%. That's 24% more of your income to spend rather than save.

    Delaying saving can mean you'll have to drastically cut your standard of living just when pressure on things like school fees and home loans may be the greatest. What it usually means is that you simply won't save enough for a comfortable retirement.

  3. I don't trust that my money is safe

    Check my previous post on this point. As long as your retirement provider is reputable, saving in a company pension or provident fund is one of the safest things you can do with your money. And because you can tuck these savings away before the tax man takes his cut, it's also one of the most efficient things you can do with your money.

How much do I need for retirement? And how do I know it will be enough?

Guy Chennells: The general rule of thumb in South Africa is that you'll need to be able to replace 75% of your income to retire comfortably. But this relies on the assumption that you won't have a home loan or any other large debt by that age, which would mean your monthly expenses will be lower than they are now.

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Recognising this isn't always the case, more and more financial planners are beginning to work on a 90% replacement ratio instead - especially as people are living longer than ever, and medical expenses tend to rise after retirement.

Assume you're retiring today with a final salary of R40 000 a month (that's R480 000 a year). To safely replace 90% of your salary for life, you would need about 22.5 times your annual salary saved up. That's R10.8 million to maintain your current standard of living. Note that this amount assumes you are following 'the 4% rule' - understand more about it here.

A rule of thumb to work out if you're staying on track is to check the following: by the time you're 30, you should have saved about 1.5 times your annual salary. By 40, you should have saved 4.5 times and by 50, it is 9 times.

If you need help calculating your retirement savings goal, or feel overwhelmed by the number you've just calculated, find a Financial Adviser who can help you come up with a plan to achieve it. The best time to start is as soon as possible, and it'll probably be easier to adjust your lifestyle now than it might be once you retire.

Why invest in a retirement annuity instead of in property?

Guy Chennells: I have myself gone the property route before. Let me assure you, it is nowhere near as easy or failproof as it sounds. Here are some of the hard lessons I've learned about property that might help you to enter it with your eyes wide open.

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  1. Property becomes a second job. Managing tenants, maintenance, body corporate politics, tax returns, and so on can be stressful and very time-consuming. You could get a managing agent to take some of that admin away (but never all), but you'll need to pay extra for that and subtract that from your 'profit'.
  2. Property is risky. You may have a terrible tenant who damages your property or who drags you through the legal system before you can finally evict them. You may have no tenant for quite a few months if demand drops. The price of the property might drop so that you can't get your money back. Interest rates may rise so that your bond becomes very expensive. Levies and special levies may rise, eroding the investment case.
  3. Property is expensive. Legal fees and duties in buying and selling property can be very large. The cost of maintenance, especially if big things go wrong, can be a huge drain on your finances at an inopportune time.
  4. Property is illiquid and concentrated. 'Cashing out' on this investment is no quick or easy process, making it illiquid. Plus, most of us could only afford to buy one or a few small properties. That means you are highly exposed to one asset class, and in fact to one asset within that asset class. That could work out well for you, but it could also be a disaster.

Investing in a retirement annuity (RA) has one thing in common with property - it is also illiquid, because you can only access this money once you turn 55 years old. But it has other advantages:

  1. It is more tax-efficient. You can contribute to an RA before your income is taxed. That is a huge advantage, even before you have invested the money.
  2. It is administratively far easier. You mostly just make the contributions, and can even set up a recurring debit order to automate regular saving. Then someone else does all the work to manage the investments and just sends you a neat tax certificate at the end of the year.
  3. Your investments can be more balanced. In an RA, you have to invest in a balanced portfolio of assets, so you are not overly exposed to one asset class (e.g. property). This diversifies your portfolio and lowers its concentration risk. So while the money is illiquid in that you can't take it out before you turn 55, it is very liquid within the RA: it can be allocated to different managers and assets classes over time.

Can I just use a tax-free savings account to save for retirement?

Guy Chennells: The short answer is you can, but definitely not exclusively. A tax-free savings account (TFSA) is a great savings vehicle designed by the National Treasury to help encourage South Africans to save for the long term.

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Your contributions to a TFSA are made after you have paid tax on that money, so it's not quite as tax-beneficial as retirement savings products, but all the gains that you earn on investments in TFSAs - including capital gains, dividends, and interest - are 100% tax free. And unlike retirement products, you can access your funds at any time. This means that you enjoy tax savings as well as flexibility.

The only catch to all this good news is that there are limits to how much you can save in TFSAs. Your overall contributions per tax year are currently (in 2021) limited to R36 000. If you exceed this annual cap, your contributions will be taxed at 40%. This means you have to manage how much you contribute to all your TFSAs (if you have more than one) and make sure you stay within the limit.

The reason you can't just use TFSAs every year to save for retirement is that they also have a lifetime contribution limit of R500 000. This only applies to your overall contributions, so don't stress if, over time, the total value of your account (with all interest, dividends and capital gains you've gained) tops R500 000.

These investment vehicles were designed to encourage people to save a bit more than their compulsory contributions towards retirement savings - with the intention of keeping this money for retirement, but with the potential to access it. This is because people are less inclined to save extra for the long term if they can't withdraw it in cash, just in case life throws them a curveball and they really need fast access to funds.

So remember, this is the way a TFSA should be used - to supplement your core retirement savings plan. As always, chat to a tax specialist if you're looking for tailored advice.

Will saving in a retirement fund save me tax?

Guy Chennells: Absolutely yes, and you probably underestimate just how much! A retirement vehicle (like a pension fund, provident fund or retirement annuity) is one of the best ways to save for the long-term, precisely because your contributions are tax-deductible for as long as you earn.

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This means that before you retire and up to a point, you can send money straight to your retirement fund, without paying income tax on it. This lowers your total amount of taxable income, so you'll owe less to SARS than you would have otherwise. The money in your retirement funds is also not taxed on the interest it gains or the dividends it earns (i.e. Capital Gains Tax), so it can really grow uninterrupted.

At the moment (2021), South African taxpayers can claim a tax deduction for contributions to a retirement fund of up to 27.5% of your taxable income, up to a limit of R350 000 per year. The higher your income, the bigger your tax benefit. Only once you retire and start to withdraw from your savings will you have to pay income tax.

So while it's never a bad idea to save money, other investments you make can only be funded after you pay income tax - which means you lose a chunk of money upfront when it could be earning interest over time for you instead.

The only caveat with retirement funds is that you can generally only access them when you turn 55, earliest, but preferably later if you want to make the most of compounding. This means that these vehicles should not be used for short or medium-term investments. But when it comes to tucking money away for your post-retirement future, the sheer, unparalleled tax-efficiency of a retirement vehicle makes it the way to go!

Just remember, when it comes to tax, there are many factors (like whether you are employed or self-employed) that can have all kinds of implications or opportunities. I'd recommend consulting a tax specialist to find out how you can make the most of your particular situation.

Why am I taxed on my income once I retire?

Guy Chennells: There's no escaping tax! But even though you're taxed on your retirement income, it's much better than being taxed on your savings (i.e. if you save another way using after-tax income). Let's work through a simple example to understand why.

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  • Scenario 1 - get taxed right away when you invest while earning a salary

    You earn R 1 000 and decide to save it in a bank or invest it somewhere else. First you need to pay income tax. If, say, your tax rate is 35%, you'll have just R650 left to save. Once you invest it, you'll also have to pay tax on the interest, dividends and capital gains you earn on it. Your R650 growing at, for example, 10% a year, will in 30 years be worth about R11 350.

  • Scenario 2 - get taxed after retiring when you save in a retirement fund

    You earn R1 000 and decide to save it in a retirement fund. The entire R1 000 goes in, since you aren't retired yet. With a tax rate of 35%, that's an extra R350 saved upfront from taxes!

As your money grows in your retirement fund, you don't pay taxes on the interest, dividends or capital gains you earn - so you have more money growing over time, tax-free. This means it'll grow at a higher after-tax rate, say 12% rather than 10%. Your R1 000 growing at 12% a year will in 30 years be worth about R30 000.

What happens once I retire?

Continuing with our example - once you retire and start withdrawing from your retirement fund, you do need to pay income tax. If we assume your tax rate is still 35%, your R30 000 saved is worth R19 500 after tax. That's still much more than the R11 350 of Scenario A.

Of course, when you finally retire, you're likely to be in a lower tax bracket than when you were earning a salary. This only makes the positive impact bigger. If your tax rate lowers to 30% once you retire, your savings would be worth R21 000 - almost double what it would be worth if you'd saved from after-tax income.

Tax savings like this are really what make retirement funds such compelling long-term investments.

How do I protect my investments from poor market conditions?

Guy Chennells: If only there was a way! But there's no clear route around risk. Sometimes the thing you fear happens. Often, it doesn't. When it does, you may feel shocked, anxious and possibly even cheated. You may feel like you must change something, quickly. That feeling right there is your real risk - being unable to stomach the bad times long enough to enjoy the good times.

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The last year or so in investing has been a lesson in this. In the first few months of 2020, local and offshore equities dropped sickeningly far and fast. Many investors moved their money to cash because uncertainty was high, and the pain of loss felt too great.

Within a month or two, markets recovered quite well, but not enough. For a few months, people got no great returns out of equity, and a low-risk strategy in bonds or cash may have seemed smart. But then, at the end of 2020, markets shot up and got to levels well exceeding where they were before the crash. Those who moved to cash would in early 2021 have about 40% less than those who simply rode the wave.

So, I urge you not to avoid, or react impulsively, to risk.

That said, when saving for retirement, you need to take only the level or risk that is appropriate for your age and stage. In general, if you have many years until you retire, your savings should be mostly in risky asset classes like equities. Markets have always averaged out when given enough time, so one can afford to wait a crash out for the expectation of better long-term returns.

If you're close to retiring, your money should be less in equities and more in stable asset classes like bonds and cash. In both cases, there should be a balance across the main asset classes. Ask a financial advisor to double-check your portfolio is well-diversified.

Should I cash out my pension for a worthy cause?

Guy Chennells: Please don't! I'm sure there are some very good reasons to cash it out, but hear me out first.

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For most people older than 30, there is no practical way to ever make up for the savings you cash out. In fact, the savings you build up in your first 10 years will account for almost half of your eventual retirement income. So, unless you want to slash your monthly budget by 50% or more at retirement, rather make whatever other painful adjustments are necessary now to avoid cashing out your savings.

I've had the experience of changing jobs with the temptation of paying off a big loan. What I did was leave my money saved while I tried to make a plan for the loan (you don't need to make a decision right away). I was able to do that by making other sacrifices - mostly around things that I missed having at the time, but I don't feel as a loss years later.

The reality is, if I had used my savings to pay off the loan, I would not have made the other sacrifices. And my life would be very similar to what it is now, only I'd be facing a much more difficult problem to solve - I would be on course for a post-retirement life that would be much worse than it is going to be.

Remember too that if you withdraw from your retirement savings before you stop working, you'll have to pay a fair bit of tax on the amount - so you'll lose a chunk of your hard-earned savings right there. If you really need to access your money now, speak to a tax specialist about the implications of an early withdrawal. And before making a huge money decision like this, it's well worth your while to consult a Financial Advisor and consider all your other options first!

How much should I save to retire well, and how long do my savings need to last?

Guy Chennells: Let's tackle a question at a time. How much you should save really depends on how old you are and how much you already have saved.

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If you're in your 20s and starting off in your career, you should be saving about 14% of your gross income to replace most of your income in retirement. If you are 30 with nothing yet saved, that number is about 22%. And it only rises from there!

Working out what this is for you personally is key, so make use of one of the many great budget and retirement planning tools available online to help you work out more accurately how much you need to save. Tools like these show you what might happen if you save less, or if investment growth isn't very good over your saving life.

As to how long you generally need retirement savings to last, the answer almost invariably is: longer than you think.

The big mistake many people make is to plan for an 'average' life expectancy (a number which is increasing thanks to medical innovation and technology). The problem is, you have no guarantees that you will be average.

If you are trying to make your money produce an income for life you only really have two very safe options:
- Draw down a very low percentage (2 to 3% or less) as an income each year of your retirement, so that you expect to never eat into your capital.
- Buy a guaranteed annuity that will pay you an income for your life, regardless of how long you live. Just make sure that the annuity you buy will have income that grows, otherwise after inflation you will find your income becoming smaller each year.

Discovery Invest has a great online tool to illustrate your life expectancy and to show you how this might differ if you are particularly healthy. Time is money in the world of investing, so the sooner you know what your retirement savings goal is, the better you can plan and if you need to, catch up!

I'm worried my retirement savings won't be enough. What do I do?

Guy Chennells: I'm assuming you have already calculated your retirement savings needs. Now you've realised that, to retire comfortably, you need to save more than you currently do. Here are some ideas to up your savings - see how many of them you can implement - the more, the better!

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  1. The most direct way to try to solve this problem is to save more. This is not easy, so you're going to need to ruthlessly cut back on your expenses. If you learn to live on less in the process, this gives you a double benefit - it increases your savings and reduces your income needs in retirement. The effect can be much bigger than you might expect. You can also incentivise yourself by taking advantage of a programme like Vitality Money, which rewards you for getting financially healthier.
  2. Try this fantastic trick: Increase your savings each time you get a salary increase. This way your income never goes down, and you'll be surprised what an enormous difference a 1%, 2% or 3% increase per year makes after a few years of increases. Learning to live off the same amount over time can come with its own satisfaction because the better you budget, the more in control you'll feel of your life and your financial future. This can bring with it a sense of accomplishment and purpose.
  3. You'll also need to be more aggressive when it comes to investing. A generally accepted rule has been to subtract your current age from 100 and have that percentage of your portfolio invested in equities - but these days many financial advisers advocate for the '110 Rule' because we're living longer. So, at age 30, you'd have 80% in equities, at age 40 you'd have 70%, and so on. This de-risks your portfolio as you get older - you can't afford a 50% crash in the markets at age 60! If you start saving late (or don't have enough saved), you may want to increase the equity portion of your portfolio. Consult a Financial Adviser though -the last thing you want is to make an uninformed decision and take unnecessary risk.
  4. Never cash out when you switch jobs (here's why), and be very careful when you reach age 55 and are able to cash out a portion of your savings. Withdrawals from some products force you to purchase an annuity, for example, to help ensure your money stays invested. Don't be tempted to use it for non-essentials. By this stage you should be adding to your savings, rather than eroding them.
  5. Plan to retire a little later. Because we're living longer, it's not uncommon to continue working (even part-time) into your seventies. If your company will let you, you can work and save for longer there. If not, then start actively planning for a post-retirement career. Even if you can only subsidise your income, it will make an incredible difference to your long-term financial situation if you can avoid drawing a big income from your savings for a few more years. Find more ideas on ways to boost your income once you retire here.

The content on this page is meant only as information. For tailored financial advice, please contact your financial adviser.

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