Retirement funding and estate planning was highlighted at this year`s TMA/Personal Finance Truth about Retirement seminars by Andrew Bradley, managing director of Capital Alliance Management Company. Esann de Kock reports on Bradley`s views about the history of retirement funding in South Africa and why he believes a retirement fund is still the best place to invest your money.
You invest money in your retirement - it is therefore crucial and in your own interest to not only stay abreast with how and where your money is invested, but also on developments regarding tax and retirement planning generally.
Retirement funding in South Africa has received a lot of attention in recent years, with various committees and commissions looking into the issue.
The latest report by the Katz Commission came up with wide ranging recommendations for changes to the tax structures of retirement funding options.
Andrew Bradley, the managing director of Capital Alliance Management Company, says the Institute of Retirement Funds vehemently objected and convinced the government not to implement the proposed changes.
It was agreed to set up a National Retirement Consultative Forum (NRCF) to look at retirement funding on a holistic basis, not only from a tax perspective.
The NRCF has now set up various theme committees to look at key issues, among which is the provision of health care after retirement. These committees have to make recommendations on how things can be structured to make sure the industry remains viable and sustainable, while ensuring that provision is made for an effective social security system.
Bradley says that so far the NRCF has come up with four principles which are extremely sound and which it should be complemented on. These are:
* That South Africa has one retirement fund. Bradley says for a small country, we can hardly afford a variety of expensive structures such as pension, provident, preservation, deferred compensation and retirement annuity funds;
* That the distinction between private and public sector tax structures should fall away: The idea is that the same retirement fund regulations should apply, irrespective of whether you work in the public or private sector;
* That with regard to pension incentives, restrictions and prescriptiveness about what percentage of your retirement pay-out you should take as a lump sum be removed. The idea is to allow you a free hand, but to create incentives for you to take minimum lump sums and to invest your retirement money wisely so that you don't become a burden on the State, and;
* That manipulation options be minimised. Bradley says people have, over the years, been able to significantly reduce their rate of tax at retirement, by manipulating their average tax rate and by buying back years of service.
He says some people have been able to easily reduce their average rate of tax at retirement to 17 percent, although realistically, he now sees people reducing their average rates to 30 percent.
He believes South Africa is moving into a new era as far as retirement planning is concerned.
"Gone are the days when we looked at tax structured schemes as the sole purpose of retirement planning, when people went into all sorts of schemes merely because of the tax benefits, while ignoring crucial investment principles."
With the restructuring of taxation on retirement planning, many of these schemes have been negated.
Bradley predicts people will start looking at retirement in an entirely different light, where, whatever decisions they take, investment merit will be paramount.
You cannot afford to be short sighted.
Retirement capital needs to last for 20 to 30 years. You need to follow sound investment principles to ensure that this happens.