In the past, the popular choices for pension savings were employer-backed free-standing pension and provident funds. If these options were not available, individuals looked to Retirement Annuity Funds (RAFs) to provide a comfortable retirement in their golden years.
In the past, the popular choices for pension savings were employer-backed free-standing pension and provident funds. If these options were not available, individuals looked to Retirement Annuity Funds (RAFs) to provide a comfortable retirement in their golden years.
But with volatility gripping markets, global economies slowing down and a burdensome pension-saving regulatory environment, what are the best options for you?
John Anderson, portfolio manager at Sygnia Asset Management, advises that a host of factors are at play when considering which option is best – one of them being whether your employer has a pension savings vehicle in place.
If there is an arrangement offered by your employer – either via a free-standing fund with a dedicated board of trustees to manage it, or your employer’s participation in a commercial umbrella fund – Anderson says that these options are generally the most cost-effective and tax-efficient ways of pension saving.
Unlike free-standing pension and provident funds that are specifically set up for one employer or a group of related employers, umbrella funds (sponsored by a financial services company) allow multiple unrelated employers to participate in a retirement scheme.
If pension saving options are not offered by your employer, then an individual RAF is generally a good choice.
Another factor for you to consider are the costs associated with all pension saving schemes. “When assessing costs, you need to consider all the different types of charges, as often there are a number of layers of charges associated with different options that are cleverly disguised. This even applies to arrangements your employer puts in place, in particular umbrella funds effective arrangement,” Anderson explains.
As a contributor to all these pension saving arrangements you have an exposure to shares and bonds, amongst other asset classes. Free-standing pension and provident funds, RAFs and umbrella funds are a more tax-efficient way of investing in shares without capital gains tax and taxes on dividend payouts (typically associated with owning individual shares).
The pension saving market has been transformed in recent years, with more investment products being made available – and all these new products are now being subjected to more scrutiny when it comes to the different layers of costs.
Umbrella funds have been gaining in popularity because of their cost-saving potential, as it has become more laborious and costly for employers to run their own pension saving funds. However, umbrella funds in South Africa have had a checkered history, often laden with high costs such as administration and asset-management fees.
“There are new umbrella arrangements that do pass those fee savings on to contributors…Some of the latest umbrella fund arrangements can reduce costs by as much as 50% to 70%, depending on the scheme an employer is participating in,” Anderson advises.
In April, Sygnia launched the Sygnia Umbrella Retirement Fund, positioning the offering as a cost-effective vehicle that is transparent through its fees and charges.
The general rule of thumb is that 15% of your monthly salary should be allocated to pension savings, but this figure is based on the general period of pension saving of at least 30 years.
“The calculations on which these rules of thumbs are based assume that you achieve investment returns of 5% (after fees) above inflation and that you do not cash in your benefits when you change jobs,” continues Anderson.
“If you save for a shorter period, retire earlier than the age of 65, your returns are lower or you cash in your retirement savings when you change jobs, then you will need to save more.”
It is arguably difficult for South Africans to save more than 15% given their financial priorities. “However, if you are able to do so, you can contribute up to 27.5% of your income, up to a limit of R350 000 per annum before being taxed on those contributions. It’s best to contribute as much as you can from the youngest age possible.”
After all, if you retire at the age of 65, you would typically need up to 12 times of your annual salary as a lump sum to afford a reasonable retirement.