A Fin24 user who has left his retirement planning a tad late is seeking advice on which pension policy would suit him best.
He writes: "I'm 45 years old and haven’t started a retirement fund yet as I've made sure my children had a good education first. Now that I'm thinking about starting a pension policy I'm wondering which would suit me best? Do I invest annually in a tax free savings account or go to a company that allows me to do a monthly contribution with an annual increase?
I cannot afford R10 000 which is what has been suggested at this late age. Do you have any suggestions on how best to go about planning for my retirement please?
Matthew Chapman, a CFP® Professional, of NFB Financial Services Group responds:
In terms of building a retirement portfolio for yourself now I would note the following:
Ordinarily we advise that clients have a healthy split between taxable (discretionary) and tax deferred (retirement) investment products, as both of these investment vehicles will have a trade-off between liquidity and tax efficiency.
Typically tax deferred products such as pensions & retirement annuities will enjoy tax free growth within the product whilst restricting liquidity until formal retirement, or age 55 in the case of a retirement annuity. However, once an income is drawn from these products in retirement, the income is fully taxable as if it was a salary, which is why we refer to them as tax deferred.
It should also be noted that you cannot simply join a pension scheme as this would be provided by your employer. A retirement annuity could be used in place of a pension should there not be an active scheme you are eligible for.
Discretionary products, such as a linked unit trust portfolio, have full liquidity but the investment returns in the form of interest; dividends and capital gains are taxable. Withdrawals from these products are however not taxed as income as retirement products are.
However, with the advent of the Tax Free Savings account you can enjoy the best of both worlds, with full liquidity and non-taxed investment returns. The annual contribution limit is R30 000 or R2 500 monthly. We would advise that clients contribute the first R30 000 of annual investment to this product.
The remainder of your monthly investment could then be allocated to a retirement product such as a retirement annuity.
If you feel that you are then comfortable with additional saving or have lump sums to invest these can be used to increase your discretionary portfolio. Without full knowledge of your current circumstances; investment portfolio and other applicable information I cannot advise on an exact investment portfolio as each investor is different and deserves a fully encompassing analysis.
As this cannot be construed as formal financial advice, it would be in your interests to contact a certified independent financial adviser, who will be able to conduct a full analysis on your financial position and goals provide professional guidance with regards to your entire financial plan and risk profile.
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