Understanding how your (or your loved one’s) possessions and wealth are treated when you pass away is crucial to how you plan for what will happen to them. This blog is aimed at breaking down an incredibly paper-heavy, jargon-filled process!

When a taxpayer dies, all their assets are placed in an estate, which is commonly referred to as a ‘deceased estate’. Assets can include a property, a car, money in the bank, and even furniture.

Once an executor has completed all the administration and has repaid all the deceased’s debts, the remaining assets will be distributed to the beneficiaries, which can be heirs and/or legatees (a legatee receives a specific asset from the estate, while an heir receives the balance).

Anyone who owns a property in South Africa is forced to comply with South African inheritance laws, and inheritances are governed by The Administration of Estates Act, The Wills Act, and The Intestate Succession Act (yup – paper-heavy!).

There are agreements with certain countries to avoid double taxation in relation to estate duty, such as the UK, USA, Zimbabwe, Botswana, Lesotho and Swaziland.

A brief overview of estate duty

Estate duty is a tax on the transfer of assets from a deceased estate to beneficiaries and, as of February 2018, the rate of estate duty increased from 20% to 25% on estates worth more than ZAR30 million.

A person is liable to pay tax on all income that they receive or accrue up until the time of their death, and an executor will act as the representative taxpayer to settle any outstanding debts. The deceased estate can be tallied up from the date of death, and all assets will be held by the estate until the account has been inspected and finalised. Once this has been done, the assets will be either distributed amongst the heirs or delivered to the trustee.

An estate worth less than ZAR30 million is subject to estate duty of 20%, after a deduction of ZAR3.5 million against the net value of the estate has been taken into account. For example, if the total net value of an estate equates to ZAR4.5 million, an amount of ZAR200,000 will be liable to be paid in estate duty (20% of ZAR1 million, which is the amount exceeding ZAR3.5 million). Generally, the executor will take care of paying the estate duty, but there are times when the beneficiary pays the duty directly.

Inheritance vs. donations tax

The good news is that you don’t need to pay tax on any money that you inherit, as an asset inherited is a ‘capital receipt’ and is not included in your gross income. You also won’t have to pay Capital Gains Tax on an inheritance as, if CGT is applicable, it is usually paid by the estate.

In terms of taxation, an inheritance is treated differently to a donation and a gift. Companies or trusts are exempt from paying tax on up to ZAR10,000 in casual gifts in one tax year, while South African residents can receive up to ZAR100,000 worth of donations tax-free.

However, any donations above this amount are subject to a donations tax of 20%. So, if you are donated ZAR140,000 (whether in a once-off lump sum or over several donations), ZAR8,000 will be payable in donations tax (20% of ZAR40,000, which is the amount exceeding ZAR100,000).

When it comes to property, donations tax is payable at a flat rate of 20% on the value of a donated property. However, donations exceeding ZAR30 million are taxed at a rate of 25%; and only the first ZAR100,000 of property donated each year is exempt from tax.

It is the donor’s responsibility to pay donations tax when donating property, but if they fail to do so within a set time period, the onus falls on both the donee and the donor together. However, donations tax doesn’t apply between spouses, South African group companies and if donations are made to certain public benefit organisations.

In light of these regulations and restrictions, it’s important to decide how you can best arrange your affairs to ensure you maximise the amount you can give to your loved ones. Don’t hesitate to arrange a meeting to discuss your liabilities and options, so that you can ensure your assets aren’t subject to unnecessary deductions.

Information for this blog was sourced from: http://www.sars.gov.za

Death can be an expensive affair and it is easy to underestimate the costs involved, especially as some unconsidered fees can quickly add up.

As well as the funeral expenses, those left behind can be liable to pay mortgage bond cancellation costs, appraisement costs, Master’s Office fees, legal fees, costs of realisation of assets, bank charges, transfer costs of fixed property or shares, maintenance of assets, advertising costs, probate fees, postage and sundry costs, short-term insurance, taxes on investments, and even duplicate motor vehicle registration certificates…

Estate costs generally fall into two categories – administration costs, which arise as a result of the death; and claims against the estate, which are the liabilities of the deceased.

Generally, the biggest administration costs tend to be the executor’s and conveyancing fees.

However, advance planning can help to cover estate costs or at least reduce them significantly. Here are 6 things you can do now to reduce your estate costs for your loved ones in the future. Don’t hesitate to arrange a meeting to discuss your options.

1. Leave a valid will

If you die without a valid will, your estate will be devolved according to The Intestate Succession Act, rather than in accordance with your wishes. Not only is it likely that some of your assets will not be distributed how you wish them to be, but this process can often be more complicated and come with higher legal fees, as well as the potential for costly disputes.

2. Negotiate the executor’s fee

The devolution of an estate requires an executor to sign off the liquidation and distribution of assets, and confirm that all costs are correct. Once you have appointed an executor, you should try to negotiate the executor’s fee when you are drafting your will. You could either then stipulate the fee in the will or request that the executor confirm the agreed fee in writing.

Depending on the composition of your estate, the executor will quote a fee in accordance with how much work is required, and you could potentially negotiate up to a 50% discount.

If your estate is relatively straightforward — for example, you only have one heir, no business or offshore assets, and sufficient cash to cover all costs, you may find that the executor will offer a big discount.

However, if you do not explicitly specify the executor’s remuneration in your will, it may likely be calculated according to a prescribed tariff of 3.5% of the gross value of all your assets. The executor will also be entitled to a 6% fee on all income earned after the date of your death, and if the executor has registered for VAT, then another 15% will be added to the grand total.

3. Avoid costs of security

According to an article published on Moneyweb last year, “costs of security can be avoided completely by exempting the nominated executor from lodging the bond of security in the will.”

4. Prepay your funeral

Planning and paying for your funeral before you die removes a rather big expense that your family or estate must cover after you’ve passed. By choosing the type of funeral you would like in advance, you not only fix the costs, but you also save your loved ones the difficult job of making decisions and having extra admin while they are in mourning. You can simply pre-pay the money into an insurance fund or trust account where it will sit until the time comes to pay for your funeral.

5. Jointly own property

A simple way of potentially reducing estate costs is to hold assets, such as a house, with another person. When you die, any joint asset should automatically pass over to the surviving owner, so will not be considered part of your estate and subject to probate fees. Do note that probate fees can be substantial, so it is important to factor them into your estate planning.

6. Buy life insurance

If there is insufficient cash to settle administration costs and claims against your estate, the executor will need to approach your heirs to see if they are willing to pay the shortfall to avoid the sale of any valuable assets.

If you don’t have enough funds to cover a bond, think carefully about whether you wish to leave the property to someone specific, as they would have to settle the costs and the property may end up being more of a burden than a benefit. If you wish to bequeath an item to a beneficiary, it is best to do so free from any liabilities, as all your debts must be paid before any money or property can be passed on.

To avoid leaving your heirs in a situation where they are forced to settle outstanding debts, it is important to take out life and/or bond insurance to ensure sufficient cash is available to cover any accumulated claims.

Life insurance proceeds are always paid tax-free, and you can name your estate as the beneficiary, in which case the money will be paid to your estate to cover estate costs. Although your estate will pay probate fees on the proceeds, it will ensure your estate has enough cash to pay debts, taxes and other obligations, so as to avoid the sale of assets that beneficiaries may wish to keep.

Alternatively, you could name a beneficiary for your insurance proceeds, and the money will be paid directly to them. If you do this, the money bypasses the estate process and will not form part of your estate, so will not be subject to probate fees and there won’t be any delay in receiving the money.

(Information gathered from moneyweb.co.za and getsmarteraboutmoney.ca)

Did you know that a trust is not simply: a trust?

There are many different classifications of trusts in South Africa, such as ownership trusts, bewind trusts and curatorship trusts.

Trusts can either be created during a person’s lifetime, which is known as an inter vivos trust, or set up according to a person’s will after they die, which is known as a mortis causa trust.

Different trusts give beneficiaries different rights, depending on how much a trustee wishes to distribute of an income, assets or capital to beneficiaries. And trusts can be used for a variety of purposes, from asset protection to charity. There are also ‘special trusts’, which can be set up for the benefit of a person with a disability, or relatives who are under 18 years old.

Although trusts have been around for centuries, there are many misconceptions that surround them and they have become far less popular in the last couple of decades. The SA Revenue Service (SARS) is arguably partly to blame for the bad reputation that trusts now have, and their continual criticism has resulted in many owners deregistering their trusts and transferring out their assets.

Given that there is a quagmire of misinformation out there, it is important to educate yourself if you have a trust or are thinking of creating one. Here are 5 truths about trusts that may debunk some myths and help you on your way:

1. Trusts aren’t only for the wealthy

Although many people believe that trusts are only for the rich, the best time to set up a trust is actually when you are making preparations to build wealth, before you have accumulated a significant fortune. Registering a trust after you’ve generated wealth could end up being expensive — due to various costs, such as capital gains tax and transfer fees that you will need to pay when you move your assets into trust.

2. Trusts can help with tax planning

A unique feature of trusts is that they allow you to shift tax burdens from the trusts to beneficiaries through the ‘conduit principle’, which, according to the South African Institute of Chartered Accountants (SAICA), means that “if income accrues to a trust and the trustees award it to one or more beneficiaries in the same year, the income retains its nature in the hands of the beneficiary.” This basically results in less taxes needing to be paid.

Even though the sole point of a trust isn’t to save on taxes, you do stand to save on capital gains tax, estate duty, executor’s fees and income tax if you set up a trust and manage it properly. Consequently, SARS is not a fan of trusts, particularly because trusts enable the postponement — and potentially the avoidance — of estate duty in the event of death.

All trusts need to be registered with SARS and the trustee is usually the representative taxpayer of a trust. However, the income of a trust can be taxed in the hands of the donor, beneficiary, or the trust itself.

3. You can still control your assets in a trust

Contrary to popular belief, a trust can be structured in such a way that allows you to maintain a sense of control over your assets. You can legally be both a trustee and the founder, and you can even be a beneficiary, while maintaining the legitimacy of the trust.

4. You can do your own admin

When it comes to setting up a trust, be sure to choose your service provider wisely, as some charge exorbitant fees. If possible, it can be worth doing as much of the administration as possible yourself, so as to reduce costs and ensure that your financial plan is executed as per your intentions.

5. It’s important to read your trust deeds

If you do decide to include a trust in your estate planning, be sure to always take the time to read your trust deeds and to adapt your trusts to any changing circumstances. Many trustees have little knowledge of what is expected of them as managers of a trust. And no trustee can ever claim ignorance if they don’t strictly adhere to the management of a trust deed.

However, a trust will only be investigated by SARS if it is obviously being misused or mismanaged. If it is correctly structured and administered in accordance with common law, the trust deed, and the Trust Property Control Act, a trust is a perfectly legitimate investment vehicle for South African tax residents.

(Information gathered from SARS and IOL)

Each year, about a million people need to stop working due to an illness or a debilitating injury. Yet, according to an article published in The Times, only 10% of people have severe illness cover.

A severe illness is a medical condition that prevents you from leading your normal life, and the life industry covers a wide range of these dreaded diseases and health conditions, from Type 1 diabetes to Parkinson’s disease. However, the ‘Big Four’ — a heart attack, a stroke, cancer or a coronary artery bypass graft — form the core of most policies, as these form over 80% of claims.

A severe illness usually requires regular visits to specialists, treatment, medication, and potential lifestyle adjustments. However, it is possible to survive a severe illness with the right medical treatment and support.

Why is severe illness cover necessary?

A severe illness typically has three phases: 1. Diagnosis; 2. Treatment; 3. Recovery. Your medical aid and gap cover should be able support you through most of the basics of the first two phases, but severe illness cover is designed to support you through your recovery period, which can be expensive and is when you are likely to feel the financial impact of costs that you might not have initially considered.

While your medical aid and gap cover may pay for the direct costs of a severe illness, such as hospitalisation and basic treatment, there may be annual limits. It will also probably not cover specialised treatments, alternative therapies, and rehabilitation; or indirect expenses that arise to meet necessary lifestyle changes, such as taking time off work to recover, making home and vehicle adjustments, or hiring an au pair to look after your children.

Around half of people who survive a severe illness also suffer some form of depression, but one of the most commonly overlooked expenses is the treatment of depression, which can last weeks or years.

Disability cover vs. severe illness cover

If you have already sensibly taken out disability cover, you may think that severe illness cover is superfluous to your needs. However, you would be wrong. While basic disability cover is an important precaution that will protect you in the event of being permanently unable to work, it may not pay out if you are temporarily unable to work due to a severe illness that isn’t terminal.

Many employers in South Africa will pay 30 days of sick leave over a three-year period, but your monthly income will likely be reduced when you have used all of your entitlement. While disability cover will come into play if your income needs to be replaced on a long-term basis, severe illness cover will pay out a tax-free lump sum that you can use to replace any lost income for a short period.

A severe illness policy should also be able to cover anything from overseas treatment, to assistive devices and a home helper. The tax-free lump sum payout can be used immediately in whatever way you choose, so that you can have the best possible treatment and recovery plan, without having to dip into your investments or savings.

The options

Many severe illness policies pay out in tiers in accordance with the severity of an illness. So, for example, if you are diagnosed with stage 4 cancer, which is the most severe form of the disease, you will likely receive a payout of 100% of the sum insured. However, if you are diagnosed with a cancer that has less of an impact on your lifestyle, you may receive a payout of up to 75% of your cover amount. Likewise, if you have a heart attack, your payout will be determined by blood markers and the level of damage to the heart tissue.

If you have this ‘tiered benefit’, you can receive another payout if the illness progresses and becomes more severe. However, if you receive a 100% payout when you are first diagnosed, you cannot claim again for related conditions. If you have a comprehensive policy, you can receive benefits if you suffer a claimable illness that has nothing to do with your first claim. For example, if you once received a payout for a stroke then are diagnosed with cancer years later, you can also receive up to 100% of the sum insured for the second condition. Just do be sure to enquire beforehand as to your insurer’s definition of an unrelated claim, as this can differ between providers.

Whether you choose a stand-alone benefit, or one that accelerates, can also make a big difference to the cover you receive. Accelerated benefits may be cheaper, as they essentially are an early payout of your life cover, but they can also reduce other benefits.

In recent years, there has been an increase in the number of claims for the early stages of severe illnesses, which shows that policyholders are consulting their doctors earlier, thereby greatly improving their chances of successful treatment at a lower cost. Given that it is better to vigilant about your health and seek advice and treatment as soon as possible before a disease progresses, it is very important to opt for comprehensive severe illness cover that allows the flexibility of early payouts.

A comprehensive policy should have a catch-all category that will cover you if you contract a severe illness that does not fall within a specific definition.

If there’s a history of a severe illness in your family, it is advisable to have regular medical check-ups so that you can be diagnosed early if you are affected. An early diagnosis, along with comprehensive severe illness cover, can maximise your chances of recovery. If you have already had a severe illness, you may still be eligible for cover but, depending on the type of severe illness suffered and your age at the time, there may be restrictions, such as exclusion of specific illnesses.

A monthly contribution to a severe illness benefit can significantly ease any recovery or even save your life. Nowadays, over 300 illnesses are covered on some severe illness policies, but the breadth of cover beyond the core four illnesses may affect your premiums. Don’t hesitate to arrange a meeting to discuss the range of options and benefits available.

It is highly likely that one of your biggest assets is your earning power. It is vital to protect this asset and ensure you maintain a steady salary until you have reached your financial goals.

Many people take a head-in-sand approach when it comes to income protection, believing that they’ll never be inflicted with a disability, or assuming they can find a quick resolution if they are. However, this doesn’t necessarily equate to positive thinking, but rather naivety. A more responsible approach would be to hope that disaster won’t strike, while still having a back-up plan in place in case life has other ideas.

The truth is that a lot of circumstances are completely out of our control. And for most people, the reality is that losing a regular income stream (particularly that of the breadwinner) could potentially result in not being able to afford everyday items, such as groceries, as well as larger expenses, such as school fees and bond repayments.

If an unforeseen circumstance arises that prevents you from working, and you haven’t protected your income, you could immediately feel the blow and the knock-on financial effects for years.

Statistics highlighted in an article published on Money Marketing highlight that over a quarter of people will suffer a disability between their twenties and when they retire, and that 10 people per hour have a stroke in South Africa. Unfortunately, anyone can have a debilitating accident or develop a medical condition at any given time, so it’s important to safeguard our financial affairs in order to look after our liabilities and loved ones.

When it comes to disability cover, there are many options, but it’s advisable to choose the most comprehensive cover that you can afford. Fortunately, income protection benefits offer much more holistic protection nowadays, and can cover other claim categories, such as critical illness, hospitalisation and functional impairment. This is of particular note as, in 2017, almost half of the disability claims paid by a leading insurer fell under the classification of functional impairment.

You can easily reduce your financial risk exposure, protect your investments and ensure you can meet all your obligations by investing in comprehensive disability cover. A holistic disability cover will provide you with more certainty, so that you can rest assured that your financial situation is protected in all eventualities. Please don’t hesitate to arrange a meeting to seek advice on selecting the right disability cover for you.

(Info from moneymarketing.co.za)

“It is health that is your real wealth” — Mahatma Gandhi

Many entrepreneurs and ambitious people are concerned with climbing the career ladder and building their wealth. However, as you get older or suffer bouts of illness, you will start to appreciate the true value of your health and not take it for granted. Although achieving your goals is understandably important, you don’t need to completely abandon your health in your pursuit of success.

It’s simply not worth sacrificing your physical or mental health for the sake of your financial health. It is as important to lead a balanced lifestyle as it is to have a balanced portfolio, and to treat your health like your savings plan by investing in it regularly.

Certain practices that are common in today’s high-paced world — such as eating lunch at your desk, going home after dark, not having enough sleep — won’t help you in the long run. Working over 12 hours, eating junk food, and only catching a couple of hours of shuteye each day isn’t a healthy way to live and can easily lead to burn-out or severe illness.

And, what’s the point in saving for your future if you’re not going to be able to enjoy it?

Many illnesses these days are stress-related or the result of an unhealthy lifestyle, and are actually avoidable. For example, Type 2 diabetes is a common example of an often self-inflicted disease. And even If you don’t immediately die from an illness, you could still suffer some serious side effects that can last into old age and may stop you from doing some of the things you want to do.
Ultimately, prevention is better than cure. Starting a retirement plan isn’t the only way to make sure you will live comfortably in your autumn years. You can also prepare for your future by taking good care of your health. Otherwise, all those years of chasing dollar signs could cost you dearly, and you could end up paying a much bigger price — financially, physically and emotionally.
If living a longer, healthier life isn’t enough motivation to start caring for your well-being, then see your health as another financial investment, as being healthy can actually save you money in the long run! The cost of medication, doctors appointments and hospital stays can add up to way more than the cost of gym membership, healthy meals and adequate insurance. It may cost a bit of extra money now to stay healthy, but it’s even more expensive to get sick.
Value your health, as you could do much better things with your hard-earned money than spend it on chronic medication and specialist appointments that could have potentially been avoided.
Just as your savings are your responsibility, so is your health. Small lifestyle changes — such as going on a daily walk or drinking a green juice instead of a Coca Cola — can make a big difference.

It’s simple really — exercise regularly, let food be thy medicine, get enough rest, and spend quality time with your loved ones.

And just as you get professional help with your investments, it can also be worth employing experts to help you to attain your lifestyle goals. A personal trainer or a nutritionist can guide you in making good choices, just as a tax consultant can advise you when it comes to filing your tax return.

Ultimately, you still need to do the real graft yourself, but a qualified professional can encourage you, as well as save you from making mistakes that can make it harder to achieve your goals.

Manage your health for the sake of your wealth, and realise the value of a healthy body and mind. As with many things, a bit of foresight and preparation can save you a lot of issues in the long run. Don’t hesitate to arrange a meeting if you wish to make any changes to your financial plan to ensure you can maintain a healthy portfolio that complements, rather than obstructs, a healthy lifestyle.

This Thursday, 9th August is National Women’s Day, which marks the historic moment on 9th August 1956 when 20,000 South African women of all races showed that they would not be intimidated by unjust laws when they marched to Pretoria’s Union Buildings to present a petition to the prime minister against the carrying of passes. It was one of the largest demonstrations staged in the country’s history and, to commemorate the event, the first National Women’s Day was declared a national holiday in 1995 once South Africa was a democracy.

Since then, celebrations take place throughout the country on this day each year, and August has been declared National Women’s Month.

With various campaigns that have come to the forefront in recent times, such as #MeToo and #ImWithHer, women are more empowered than ever. However, there is still a long way to go in terms of female rights around the world, and women are still often subject to discrimination and inequality, not to mention harassment, in the workplace. According to research published in September 2017, female managers in the UK earn GBP12,000 less than their male counterparts, and the World Economic Forum believes that it will take 170 years to completely close the gender pay gap around the world.

South Africa is particularly guilty of this gap. A 2017 report run by a market research firm highlighted that women in South Africa earn, on average, 27% less than their male counterparts. And the report found that the difference is even wider when it comes to high earners, with men in top positions earning as much as 39% more than women of the same standing.

Experts believe that this pay inequality could be one of the reasons that many South African women are not properly prepared for retirement, as recent findings published in Fin24 have revealed that 32% of female South Africans feel unsure about their retirement plans, while men seem to be clearer about their long-term investments.

A survey conducted by Ellevest has found that women don’t invest as much or as early as men do, so women often retire with less money, even though they also tend to live longer than men. Many of the women surveyed were actually very clear on their financial goals — retirement, travel, and paying off debt were the top three priorities — but less than half of those questioned said they know how to achieve these targets.

The survey showed that the majority of women are dissatisfied with many aspects of their finances, such as their net worth, their investment portfolio, and their retirement savings. And less than half of the women surveyed felt satisfied with their financial knowledge. Furthermore, 48% agreed with the statement that “most women have to work twice as hard to get half as much,” and this double standard clearly needs to be rectified.

Taking control

Slowly times are a-changing and, in January 2018, Iceland became the first country to make it illegal for women to earn less than men in the same position. As women are gaining more and more control over their professional lives, they are also looking to take more control over their finances too. Experts believe that a key step to female empowerment is for more women to get involved in their family’s long-term financial planning.

Although gender discrimination is sadly still an issue in our society, it’s time for more women to take responsibility for their savings plans, including retirement preparation, which is often left to men.

Recent political and economic events across the world are forcing women to reevaluate their financial situations. Many women questioned by Ellevest admitted that putting away money for their financial goals would boost their confidence, and the survey showed that women clearly value the feeling of being financially savvy. According to the survey more savings equates to more confidence for many women — and is more important than salary and support in the workplace.

National Women’s Day pays homage to the women of South Africa who fought against the tyranny of the Apartheid government and helped to shape the country. Their march in 1956 when they delivered bundles of petitions containing more than 100,000 signatures was an inspiring display of political and inner strength, as well as female solidarity. Let this day serve as a reminder of the capable women who continue to pave the way forward; and let it give courage to women across the nation to realise their strength and to take control of their wealth portfolios.

(Info sourced from time.com, fin24.com and iol.co.za)

Creating your long-term saving goals (this is retirement for many people) is not something that you can simply decide on the spot – and often, these goals may change over time. Before you even get into some of the technicalities of long-term saving strategies, as we will cover in this blog, you need to know why you’re saving – and what you’re saving for. When you know the why, the how is much easier.

This should become an ongoing conversation with your financial advisor – one blog simply cannot cover it all – but hopefully it will help you on your journey!

Given the advances already made in the fields of technology and medicine, we are living longer than previous generations, which means that a balanced and robust portfolio will make provision for a long and happy retirement after you hang up your work boots.

Delaying saving for retirement is not uncommon, as other life costs can easily seem more important when you are young. Even those who are forced to save — as a result of a compulsory deductions at work — still might not have enough when it comes to retirement age.

It’s not only how much money we save that counts, but also when we start saving. Your retirement should be a time when you finally get to reap the rewards of decades of hard work. However, if you wish to enjoy these golden years in comfort, it’s best to start saving when you’re young, as the earlier you start, the less you need to put away each month.

Many people only start saving at the age of 28, rather than when they first start work. And there are even more who wait until their thirties, or later still. The problem is that if you start later on in life, you’re not just faced with trying to catch up on the amount that you could have been putting aside before, but you also need to make up for the compounded returns that you’ve missed out on. The earlier you start saving, the more you can benefit from the market contributing to your retirement through the power of compound interest.

For example, if you start saving ZAR5,000 a month at 25 years old, at an
annual average of 6% return, you’ll have more than ZAR7-million by the time you hit 60.

However, if you start saving the same amount a decade later, you will only have ZAR3.46 million by the age of 60. You’ll, therefore, need to increase your savings to ZAR10,000 a month to reach ZAR6.9 million in your 25-year investment horizon.

How much will you need

The first step towards saving for your retirement is to figure out how much you will likely need. Most retirement experts in South Africa advise that you’ll probably need to replace about 75% of your current income to retire comfortably, assuming you don’t have a home loan or any other large debt by that age. Peter Doyle, the former president of the Actuarial Society of South Africa, explains that “12 times your annual salary is likely to buy you a financially comfortable retirement.”

However, in recent experience we are finding that those wanting to retire need about 90% replacement ratio, especially as medical expenses are likely to rise as you get older.

To achieve a comfortable retirement, it is widely recommended to save at least 15% of your gross income over a 40-year career if you start saving at the age of 25. However, a late start or early retirement would obviously require a much higher savings rate.

How to save

When it comes to saving for retirement, you need inflation-beating investments and as much time as possible to benefit from the compound interest.

There are various retirement plans that you can choose from. The most tax efficient way of saving in South Africa is arguably to invest the maximum percentage of your salary possible in your company’s pension scheme and/or a retirement annuity (RA).

The good news is that contributions to a retirement annuity, which you can invest in through a financial services provider; and/or pension or provident funds, which are provided by employers, are tax deductible up to a certain amount (you can contribute up to 27.5% of your gross remuneration — up to a maximum of ZAR350,000 per year — to a pension fund or RA). And, as you can save pre-tax with these vehicles, you can benefit from the compounded growth on a larger amount.

A major benefit of an RA is that all growth is completely tax-free, but it is important to review all the costs, as life-linked retirement annuities can be expensive. If you do wish to invest in an RA, it’s advisable to select one that has no penalties or obligation for monthly contributions. The best ones don’t have any upfront fees and operate on a pay-as-you-go basis.

More flexible retirement products are usually unit trust-based, as these allow you to decide when and how much you want to contribute. Generally speaking, a balanced unit trust offers a good savings option for retirement, as it should provide adequate equity exposure for long-term growth, as well as more stable asset classes that can mitigate the investment risk.

You can also supplement your savings by investing in a tax free savings account (TFSA), an investment property, or trading in shares. A tax-free investment could be a suitable additional investment, as it still offers tax benefits without some of the restrictions that can come with a retirement annuity. However, it does have its own restrictions — a TFSA currently only allows for tax-free savings of ZAR33,000 a year, and a lifetime limit of ZAR500,000.

How to play catch-up

It’s worth aiming to save at least ZAR15 of every pre-tax ZAR100 if you have a 40-year timeline. However, if you want to retire before the age of 65, or put off saving until your thirties or later, then you will need to increase that saving rate. If you start saving at age 30, you will likely need to save 20% of your gross income, while starting at 40 years old will mean you will need to save 42%.

If you’ve left it late or realise you need more savings to retire comfortably, the easiest way to solve this problem is to save more (saving an extra ZAR4,000 a month on a ZAR40,000 salary will make a big difference). If you are willing to cut back on expenses, find a way to generate extra income, inject part of your annual increase or bonus, or pay off your debts as quickly as possible, then invest the freed up money. Essentially if you clean up your budget, and get into the habit of saving regularly, you can work towards a healthier retirement fund.

You may also need to be more aggressive when it comes to investing. A widely accepted rule of thumb is to subtract your current age from 100 and invest that percentage of your portfolio in equities, or many people now follow the ‘110 rule’ as we are living longer. So, if you’re 30 years old, you’d invest 80%, and you’d decrease this to 70% at age 40 to also decrease the risk in your portfolio as you get older. However, if you don’t have enough saved for whatever reason, you may well wish to increase the equity portion of your portfolio. Don’t hesitate to arrange a meeting to discuss this so you can make an informed decision and not take unnecessary risk.

Another thing to bear in mind is to preserve your benefits rather than take the cash if you are offered withdrawal benefits or change jobs. Furthermore, although you can also access your savings in preservation funds and retirement annuities at age 55, it’s best to again keep your money invested. Don’t be tempted to use your money for anything that is not essential, as you should be adding to your savings at this stage, rather than eroding them.

Saving for retirement can seem a complex task, but it doesn’t have to be if you do a bit of research and arrange a meeting to discuss the different retirement plan options available. Building a diversified retirement portfolio will depend on your assets, your risk profile, your age and your financial goals, but you’re on the right track once you have picked a strategy that you trust, and have established a suitable retirement portfolio. This should then be reviewed at least once a year — even quarterly — so you can track whether you are saving enough and make adjustments if need be. This can be done at the same time as your tax planning so you can ensure you are taking full advantage of all the tax breaks each year.

(blog ideas were added to from fin24.com)