What is the best way to save for retirement? (2024)

Put the right retirement plans in place for peace of mind
Your retirement may still be a long way off, or perhaps it’s right around the corner. Wherever you are in life, it’s critical that you put the necessary plans in place to ensure you have enough savings for you to retire comfortably.

But where and how should you invest to save for your retirement? As with most other aspects of your finances, there is no one-size-fits-all solution. It's important to do your homework and connect with a financial advisor who can help you find the best solution for your specific situation and needs. In this article, we look at some of the retirement savings options that you can choose from.

Investment options for saving for retirement.
Several types of investment products are suitable for saving for retirement. While there may be differences in some of the product features between different financial services providers (eg the underlying investments on offer and minimum contributions), the basic product structure remains the same.

• Retirement funds
  Retirement funds provide the most tax-efficient way of saving for retirement. Firstly, your contributions towards the fund are tax-deductible, up to certain limits*. This means you pay less income tax if you’re making monthly contributions to a retirement fund. Secondly, the returns on your retirement fund savings are not subject to any income, dividends and capital gains taxes. However, there are limits to accessing your money before retirement, and in some instances, you don't have control over where your money is invested.
  • Pension fund
    This is usually provided by the company you work for (if your employer offers retirement benefits) and it will most likely be compulsory for you to join the fund. The company will pay a part of the monthly contribution and you will pay the rest. The investment choices or asset managers available to members of the pension fund are selected by the trustees, ie you have a predefined menu to choose from. There are more cautious investments limits that apply to ensure that assets are invested in a way that balances risk and returns for members. When you retire, you have the option to take one-third of the total amount as a cash lump sum tax-free (up to certain limits). The other two-thirds you must use to invest in an annuity, which will pay you a regular income during your retirement from your savings. If you leave the company before you retire (if you resign or are retrenched or dismissed), you can transfer your savings to your new company’s pension fund, a preservation fund (see below) or a retirement annuity.
  • Provident fund
    This is like a pension fund –- it's also offered by your employer. You and your employer both contribute to the fund, and it's generally compulsory to join.The difference with theprovident fund though isthat on retirement you cantake 100% of contributions plus growth made for theperiod prior 1March 2021 as lump sum or use a portion to invest in an annuity. When youretire (and you wereyounger than 55 on 1 March 2021), you have theoption to take one-third of the total contributionsplus growth made from 1 March 2021 onwards as a cash lump sum and the othertwo-thirds you must use to invest in an annuity, which will pay you a regularincome during your retirement from your savings.
  • Preservation fund
    A preservation fund enables you to preserve your retirements savings if you leave your company's pension or provident fund. You can transfer your savings to a preservation fund tax-free. It's important to know that you cannot make additional contributions to a preservation fund. You can, however, make one full or partial withdrawal from the fund before retirement. At retirement, the same rules apply as those for a pension fund.

• Retirement annuity (RA)
  An RA is basically a personal pension plan. You can take out an RA yourself, which is why an RA is a great option for people who don’t have access to retirement benefits via their employer, who are self-employed, or for anyone who wants to supplement their retirement savings. With an RA you can choose the underlying investments yourself, subject to the regulatory limits for retirement funds. Like pension funds, you must use at least two-thirds of your lump sum at retirement to invest in an income-producing annuity.

* Limited to 27,5% of your taxable income or gross remuneration (whichever is higher) during a tax year, subject to a cap of R350000.

• Unit trust funds
  A unit trust fund is a voluntary savings vehicle that pools contributions from investors in a diversified portfolio of assets that is professionally managed. It gives you affordable access to a wide range of asset classes that you usually won't be able to invest in directly as an individual investor. With a unit trust you have complete flexibility – you have the freedom to invest your savings in any asset (since pension fund regulatory limits will not apply) and you can access your money whenever you need to. Unlike retirement funds, you are taxed on any income generated within the fund and on any gains realised when you sell out of the fund.
• Tax-free investments (TFIs)
  A TFI offers a tax-efficient way to supplement your retirement savings. With a TFI you don't pay any pay tax on any of the investment returns: interest and dividend income nor capital growth. You can also reinvest all income generated into the TFI without incurring any tax liabilities. In addition, you can access your TFI savings at any time, but it is generally not a good idea to do this. You can invest a maximum of R36 000 per year, or R500 000 over your lifetime.

How to find the right option
Your preferences, needs and circ*mstances will determine what is the right option for you. Choosing the right retirement savings options requires that you ask yourself a few questions about your financial situation and personal preferences, for example:

• How far am I from retirement?
• Do I know whether my current retirement savings contributions, values and potential growth will be enough to meet my needs in retirement?
• How much can I afford to set aside every month? Can I adjust my budget to save more if needed?
• How much liquidity or access to capital do I need?
• What is the best use of the different retirement and savings vehicles for me?

Even if you are obliged to belong to your company's retirement fund, you may still want to supplement your retirement savings with an additional investment, depending on your circ*mstances. Everyone's situation will be different.

A wealth manager can help you make an informed decision
Planning for your retirement is one aspect of an overall financial plan. It's important that you consider your overall financial situation when deciding how to save for retirement. A wealth manager can help you take a holistic view of your finances to ensure all your financial decisions support one another, and can help you answer the questions listed above.

How you save for your retirement is one ofthe most important financials decisions you will make. It is worth it to take the time to understand the different options and how they match your needs, and to get expert support.

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