Problems in planning for retirement
13 August 2012
Posted by: SAIT Technical
By Prof Matthew Lester (Tax Talk)
FROM a tax perspective, investing in a retirement fund knocks the socks off investing in one's own name through an endowment policy, a company or a trust.
Contributions to retirement funds are tax-deductible, offering tax-free growth during the period of the investment. On maturity, only a portion of the sum is taxable.
So what's the problem? Why don't we all just invest in retirement funds?
Times change and one can never tell what changes may occur between now and retirement. Remember, one cannot simply withdraw from a retirement fund prior to retirement age (usually 55).
In his national budget speech in February, Finance Minister Pravin Gordhan stated: "A series of discussion papers will be released this year on promoting household savings and reforming the retirement industry ... Among the issues are improved governance over pension funds ... and ways to improve preservation of retirement fund assets and to ensure higher levels of income in retirement.”
This was followed by the national Treasury discussion paper entitled "Strengthening Retirement Savings” in May. The paper made much of the distinction between "conventional” life annuities and "living” annuities.
A conventional life annuity pays income to investors until they die. They pool longevity risk using the insurer's capital to guarantee income. A living annuity provides a phased withdrawal savings account with no longevity-risk protection.
The individual's exposure to investment risks may be substantial.
In recent years, many investors have favoured living annuities. But the downside is that, when markets don't perform or investors hit hard times, their annual withdrawals exceed the investment return. So, long before death, retirement capital is exhausted.
The paper hints at the implementation of preservation regulations, thus moving away from the pure living annuity principle towards the conventional annuity.
Investors in a living annuity enjoy the freedom of choice of investment. But this could change if regulation 28 is amended.
The problem with retirement fund investments is that so much can change between now and retirement. And if the investor is under 55, there is no question of cashing in and changing course.