There are so many ways to save: in a bank account, under your mattress, in a unit trust or in an endowment – but which option will serve you best? Here is an overview of the different ways you can save, with advantages and drawbacks of each:
The 3 Types of Savings You Need:
- Short term savings assist you with cash flow issues and emergency payments. These funds can be saved in a savings or money market account. The amount need not be large as it is just to assist you over temporary hurdles.
- Longer term savings such as an investment plan. This can be a 10 year investment plan, using the money towards an education policy, unit trust, or endowment.
- For retirement savings I would recommend a retirement annuity. The advantages of this investment type include the tax deduction of the retirement annuity premium and the fact that there is no tax payable within the fund.
Comparing Your Savings Options
Unit Trust Investment
The premium is not tax deductible and you are taxed on the growth as follows:
- Dividends – 15% is taxable
- Interest and foreign dividends – you will be taxed on amounts above the current exemption
- Capital gains Tax – only applicable at switching and disinvestment. Any gain you have made will be deducted from the exclusion and 25% of the gain will be included in your marginal tax rate.
The debit order can be fixed so it is a form of compulsory savings.The advantage of a unit trust investment is that there is no fixed investment term and the investment can be repurchased at any time. Because the premium is not tax deductible, at surrender, the entire amount is tax free.
Endowment
The premium is not tax deductible, and is taxed at 30% this is a significant amount of taxation and you should bear this in mind when opting for an endowment. On the plus side however, an endowment does provide a form of forced savings through a fixed monthly debit order this encourages savings discipline to ensure that you accumulate sufficient capital.
The capital in an endowment can be borrowed or ceded against, and it is not protected from creditors. This means that your endowment could be seized in the case of a liquidation or similar event. The minimum period of time for this type of investment is five years, and once it matures your pay-out will be tax free.
Retirement annuity
Unlike unit trusts and endowments, retirement annuities do offer tax-deductible premiums: the allowable deduction is the greater of:
- 15% of non-retirement funding income;
- or R3500 less current pension fund contributions,
- or R1750.
Growth within the fund is not taxed, and no dividend or capital gains taxes may be levied.
Retirement annuities must be run in terms of Regulation 28 of the Pension Funds Act. This means that the fund manager must choose a balance of conservative and aggressive investments which preserve the value of your retirement capital and minimise risk while aiming to beat inflation.
As with endowment funds, the fixed debit order used for retirement annuity contributions provides a forced saving which will assist you in building up your retirement fund over time. The investment cannot be ceded or borrowed against, and is protected from creditors.
The fund is fixed until retirement age, with the earliest retirement age being 55, and any capital accumulated in the fund will only be payable from this age onward. If you stop contributing to the fund, your capital will continue to be invested until retirement age. Note that in the past, investment companies were permitted to charge hefty penalties on clients who stopped their contributions – new legislation means that this is no longer the case.
When you do retire, you will be able to take 1/3 of your retirement annuity as a lump sum. The balance must be used to purchase an annuity, which will provide you with a monthly income that will be taxed at the marginal tax rate depending on its value.