How much money to do you need to retire? It seems like a simple enough question, but there are many known and unknown variables that shape the answer. The one thing that we’re sure of is that it’s never too early to start investing. Some sources quote that only 29% of retirees in South Africa can maintain their standard of living after retirement, and one in five pensioners have to supplement their retirement income with part time work.

How much should I be saving?

The rule of thumb is that if you save 15% of your salary over 35 years, you will receive 75% of your salary as a pension, given reasonable returns. The problem is that your pensionable salary is usually about only 70% of your total salary benefits which include, for example, a bonus, car allowance, medical aid and other benefits. You therefore need to set aside additional funds for retirement to cover this savings gap, even if you are a member of a company pension or provident fund plan.

We’re going to unpack the pros and cons of investing in one example of a retirement fund – a retirement annuity.

What is a retirement annuity?

A retirement annuity is a long term tax effective retirement investment vehicle for individuals. Retirement Annuities are used most often by people who do not belong to an employer’s retirement fund, i.e. people who are self-employed. However, many people use them for additional retirement saving, and by giving your money time to grow you benefit from the power of compound growth.

The pros of a retirement annuity

Many people choose retirement annuities because of their tax efficiency, because a portion of your contribution is tax deductible within certain limits. You are able to make a lump sum investment or add into the policy on a monthly basis, which becomes a forced method of saving. A retirement annuity is also not connected to a specific employer, so if you move jobs, the policy will not be affected. Another plus is that creditors can’t access this investment if you’re in financial trouble.

The cons of a retirement annuity

As with all financial products, there are fees attached to it, so it’s advisable to shop around for the best deal. The investment is also not liquid – once you start a retirement annuity, you cannot access your capital until you are 55 years old.  And you cannot transfer your retirement annuity to an offshore retirement fund if you emigrate.