How to prepare for retirement when you work for yourself

If there is one thing that the current pandemic has taught us, it is that life is unpredictable. We need to put measures in place to make sure that we are prepared for the future. There have been many changes in how and where we work. This means that for many of us who work for larger institutions on a permanent basis, the traditional safeguard of a pension and or a provident fund remains but with a new structure.

For those who have started your own business or work for multiple employers (this is referred to as the Gig Economy) you will be best advised to invest in a Retirement Annuity (RA).

What are the most cost-effective options for saving for retirement?

1. Retirement Annuities

This is a privately owned savings plan that is designed to provide an income when you reach retirement. A pension plan or provident fund is not viable for most self-employed or gig economy workers due to the cost involved.

Should you chose this option, you can:

  • Contribute up to 27.5% of your taxable income BUT not more than R350 000 per annum. This means that if you earn R2 000 000 a year, you are still limited to investing R350 000 per year
  • Should you want to invest more than 27.5% of your taxable income BUT the amount is less than R350 000, the investment agency is allowed to carry the balance forward to the following year
  • Your contributions will run between the 1st of March and the 27th/28th of February.
  • At the end of the tax year you will receive a Retirement Annuity Contribution receipt. You should submit this to SARS as this will reduce the tax you will have to pay
  • Depending on your contributions SARS effectively gives you a subsidy of between 18% and 45% towards your Retirement Annuity premium

WARNING!

For this year – 2021 – the last day of February 2021 falls on a Sunday (the 28th).

Take note that most investment houses will not accept new payments after Thursday the 25th of February!

If you only phone your financial planner on Friday the 26th it will probably be too late to set up a debit order.

2. A tax-free savings account

A tax-free savings account is not a replacement for a retirement annuity; it is an additional savings mechanism to boost cash upon your retirement.

This account will allow you to do the following:

  • You may contribute an annual amount of up to R36 000 or you may set up a Monthly Debit Order of up to R3000 pm
  • During your lifetime you may only make contributions to the tune of R500 000
  • You do not get a tax write off as you do with an Retirement Annuity
  • However, government does give you a special deal – you will not pay any tax on the growth of your investment. There will be no tax on your interest and you will never pay capital gains tax.
  • At maturity you will get a lump sum without SARS being able to lay a finger on any of it
  • Please note that if you have a tax-free savings account with an insurer and you are not happy with the returns on your investment, you may transfer the investment to a different platform without incurring any penalties.

Final words of wisdom

A diverse portfolio should include a healthy spread of investments over a number of asset classes and provide you with a passive income (often through real estate). However, tax efficient investments like the two we mentioned above are a vital part of the puzzle and should not be overlooked.

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