I know I need to save for retirement - what are my options?
There are many ways one can invest to secure a financial future in retirement. The three most common vehicles are pension funds, provident funds and retirement annuities. Learn the differences between these options here.
It sounds obvious, but the easiest way to save for retirement is through vehicles expressly designed for retirement planning. The three most common savings vehicles are pension funds, provident funds and retirement annuities. All three aim to encourage you to regularly contribute towards retirement savings that you can access when you retire.
This could potentially spare you from being fully dependent on your family or the government one day, or from being forced to keep working for as long as you live. So think of retirement savings products as the best friends of your future self!
Well-designed vehicle help you save for retirement
Government understands the importance of saving for retirement. That's why contributions to retirement savings products are tax-deductible (up to certain limits) and investment growth in them is tax-free.
This means that saving in retirement vehicles can lower your income taxes right now. Only once pensions or lump sums are paid out is each amount taxed. (To understand the tax implications of your particular situation, contact a tax specialist or financial advisor.) Here's a quick breakdown of how each retirement vehicle works.
| Who can join? | How can I access the money? | How is it paid out? | |
|---|---|---|---|
| Pension fund | This is a workplace-based plan, so you need to be employed by an employer that offers a pension fund to join. |
You can withdraw your pension fund if you leave your employer, but it's strongly recommended that you invest in a preservation fund instead of cashing out (here's why). |
When you retire, you can take up to a third of your money as a cash lump sum and the remaining balance must be invested in either a living annuity or guaranteed annuity, which will pay out income at intervals you choose. |
| Provident fund | This is a workplace-based plan, so you need to be employed by an employer that offers a provident fund to join. | You can withdraw your provident fund if you leave your employer, but it's strongly recommended that you invest in a preservation fund instead of cashing out (here's why). | Generally, up to all the money saved in a provident fund up until 28 February 2021 can be taken in cash at retirement (though this isn't advisable). All contributions after 1 March 2021 are now treated like pension fund contributions at retirement. There are exceptions for members who were 55 years or older on 1 March 2021 and who retire from the same provident fund of which they were members of on 1 March 2021. |
| Retirement annuity (RA) | Anyone can contribute to an RA. You can be employed, self-employed, and may already belong to a pension or provident fund. It serves as a separate, personal retirement savings vehicle. | Once money goes into an RA, it's pretty much untouchable until you turn 55, except in very rare circumstances. | When you retire, you can take up to a third of your money as a cash lump sum and the remaining balance must be invested in a compulsory annuity which will pay out income at intervals you choose. RA's are practically untouchable until 55 except in a few circumstances. |
So now that you understand the difference, how do you know which one is right for you? Learn about the features and benefits of each vehicle. Plus, learn what preservation funds are and how they come into play here.
This article is not financial advice. Please consult with a financial adviser for financial advice or click here to leave your details.
This document is meant only as information and should not be taken as financial advice. For tailored financial advice, please contact your financial adviser. Discovery Life Investment Services Pty (Ltd): Registration number 2007/005969/07, branded as Discovery Invest, is an authorised financial services provider. All life assurance products are underwritten by Discovery Life Ltd. Registration number: 1966/003901/06, a licensed life Insurer,an authorised financial service provider and registered credit provider, NCR Reg No. NCRCP3555. All boosts are offered through the insurer, Discovery Life Limited. The insurer reserves the right to review and change the qualifying requirements for boosts at any time. Product Rules, Terms and Conditions Apply
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