Best way to preserve your funds

2012-01-28 10:01

This month we received many questions on how to save.Ironically, it is often easier to tell people how to get out of debt and create savings than it is to tell them where to save.There are so many options out there that this often creates a hurdle to opening a savings account.The key is to start saving somewhere and to always compare costs.Even a mediocre return is better than no return at all. Don’t allow the plethora of choices to prevent you from starting to create wealth.

Gordon writes:

Where should my 48-year-old brother invest his R100 000 pension payout?

Maya replies:
Whenever you are leaving a company, you should always re-invest your pension into a preservation fund or retirement annuity.

This way you avoid paying any tax on the money and you preserve these funds for your retirement which is exactly what they are intended for.

The impact of this decision on your retirement funds is enormous, not only because of tax but because if you
spend the money, the funds will not benefit from compounding growth over time.

An interesting fact: A quarter of your final retirement lump sum comes from your first five years of retirement savings – so if you cash that in, you will reduce your final retirement savings by 25%.

Some people argue that depending on the value of the retirement fund, it may be worth taking the funds, paying the tax and then investing it in a lower cost, more flexible investment product.

What is important to remember is that there is no capital gains tax or tax on interest income in a retirement fund structure – this equates to a considerable tax saving after 20-odd years.

Deciding between a preservation or a retirement fund

A preservation fund is a savings vehicle that preserves your retirement savings until retirement, and therefore there is no tax paid on the amount transferred to a preservation fund.

1 Unlike a retirement annuity, you cannot add further amounts to the fund but it does provide greater flexibility as you can make a once-off cash withdrawal before retirement.

This would, however, attract tax and would affect the tax-free lump sum available on retirement.

2 A retirement annuity is a good option for self-employed people.

If your brother decides to work for himself, he can transfer his pension into a retirement annuity and then continue to make tax-free contributions of up to 15% of his income.

However, on retirement, two-thirds of the lump sum has to be invested in an annuity to provide for an income on retirement.

3 Costs of retirement products are often raised as a concern, but there are now many cost effective retirement annuities on the market with fees no higher than investing in a unit trust for example.

Just make sure that you understand all the costs and commissions.

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