The Budget, retirement and you: Bruce Cameron writes the first of a two-part series on how to plan for a better-off later-life.
How do you know whether you have sufficient money on which to retire, particularly now that the Katz Commission is changing the rules.
Dave Hudson, Old Mutual assistant general manager (marketing), says a significant proposal by Katz is the new way in which lump-sums could be taxed.
Katz has recommended that the total amount accrued by you in retirement benefits must be taxed on the day you retire.
This is regardless of whether you take a pension or a lump-sum benefit.
A maximum amount of R380 000 can be exempted from tax but only if you use R540 000 of the total as an investment for a monthly pension.
Government has accepted that you should be encouraged to take a monthly pension rather than a lump sum.
Based on this you should base your retirement needs on the total capital available to you the day you retire.
As a rough rule, says Hudson, if you want to maintain your income at the same level at retirement you will need a capital amount 10 times your annual salary.
Obviously this is flexible depending on your needs.
The total benefit should include everything you receive from an employment or union fund and any retirement annuities.
You can ask your company's pension administrator or the company to which you pay your retirement annuity premiums to supply the figures.
If you have been working for the same company for about 30 years you can expect your retirement benefits to come to at least 60 percent (two percent of your final annual salary for each year) of the amount.
An example:
Your annual salary R80 000
Required lump-sum R800 000
Less retirement benefits R480 000
Still required R320 000
The key is to start saving for retirement as early as possible and to review retirement planning regularly.
Paul Sieberhagen, head of legal services at Fedlife, says you have to be aggressive in "growing" your retirement benefits. This includes using all tax deductible advantages in contributing to pension and provident funds and retirement annuities.
One way if you are a member of a provident fund is to check on how much the employer is contributing. Under the present system your contributions are not tax deductible but those of your employer are.
The trick is to have your employer make the maximum contributions on your behalf giving you the tax break.
If your employer is contributing12 percent of your salary in contributions negotiate this closer to 20 percent by making a salary sacrifice.
Other advantages are that your funds are invested in a lower-taxed portfolio while increasing the lump sum benefit, which has tax advantages.
Purchasing past service in your retirement fund could enhance final benefits. By the way, Sieberhagen points out, you should plan your retirement lump sums, including retirement annuities, to pay out in different tax years. The tax on lump-sums is calculated by using the higher average rate of tax applicable in the year of retirement and the preceding year.
So plan carefully to have retirement annuities pay out in another tax period to minimise taxable earnings.
WHAT YOU NEED TO SAVE TO RETIRE WITHOUT A DROP IN INCOME (the rule of thumb is that the capital value of all your savings retirement annuities, pension capital and other investments should be 10 times your annual income)
Percentage Of Annual Income to Be Saved In Years Left To Retirement
Target10 years15 years20years25 years30 years35 years40 years
10 x Final Income 27 percent21 percent17 percent14 percent
8 x Final Income 29 percent22 percent17 percent13 percent11 percent
6 x Final Income 31 percent22 percent16 percent13 percent10 percent 8 percent
4 x Final Income33 percent21 percent15 percent11 percent 9 percent 7 percent 6 percent
2 x Final Income17 percent11 percent 8 percent 6 percent 5 percent 4 percent 3 percent
Assumption: An average return on investments of 15 percent and annual increases in income of 12 percent
Source: Old Mutual