Rethinking your retirement strategy
Traditional retirement planning has long focused on evaluating a client’s financial position –looking at net investable value, income, and expenses – to determine whether their current assets can support their desired lifestyle in retirement. However, in a world shaped by economic uncertainty, geopolitical tensions, inflation and increasing life expectancy, a more modern approach is needed - one that goes beyond financial data to include purpose, legacy, and long-term efficiency.
Investment structures outside of the norm
While retirement funds offer useful tax efficiencies and estate planning advantages, there are other complementary vehicles that work alongside traditional options that are worth considering. For South African tax residents, insurance contracts such as endowment policies can be a useful way to strengthen your retirement strategy. They offer tax advantages, investment growth opportunities through local and offshore diversification, and estate planning benefits, making them well-suited for long-term goals such as retirement.
An endowment allows you to optimize your investment by taking advantage of tax benefits, which are especially valuable for high-income earners. Income is taxed at a fixed rate of 30% and capital gains are taxed at an effective rate of 12%. By comparison, direct investments can attract income tax of up to 45% (based on your marginal tax rate) or Capital Gains Tax (CGT) of up to 18%. The tax efficiency will assist in sustaining your withdrawal requirements.
A key advantage is the opportunity to boost growth potential through diverse underlying fund selection, asset allocation, and bespoke portfolios and structures without being limited by Regulation 28 of the Pension Funds Act, which restricts how retirement funds can invest. Given the current volatility, structures such as offshore endowments offer currency and geographic diversification.
While endowment policies have an initial five-year restricted period, the end of this restricted period can be aligned with your chosen retirement age so that the policy becomes open-ended at the point you retire and there are no withdrawal restrictions.
The interconnectedness of estate and retirement planning
Retirement and estate planning are closely linked and require a coordinated approach to avoid inefficiencies and unintended consequences. A good starting point is to ensure that beneficiary nominations are updated on a regular basis, particularly during major life events or material changes to your circumstances.
If you have financial dependents, take into consideration Section 37C of the Pension Funds Act that governs the distribution and payment of lump sum benefits, payable on the death of a member of a pension fund, provident fund, pension and provident preservation fund, and retirement annuity fund. It is also critical to understand the trustees’ discretion to prioritise financial dependents and what that means in relation to your will. Including trust provisions for minor children and vulnerable beneficiaries is both wise and often necessary.
Strategic asset allocation
As retirement approaches, clients tend to be risk-averse and shift portfolios heavily towards conservative assets, such as cash and bonds. Reducing your equity exposure minimises short-term volatility but may compromise your ability to achieve long-term capital growth – potentially leading to premature capital erosion. Asset allocation needs to be appropriate for your investment term, but even more importantly, for your retirement lifestyle needs.
Behavioural biases, such as loss aversion, might lead to overly conservative strategies and knee-jerk reactions to market volatility. This highlights the importance of asset liability matching, a strategy that groups investments into three distinct risk categories or ‘buckets’ – income, stability, and growth – based on your cash flow needs.
Whether your goal is to pursue your passion, travel the world, spend more time with your grandchildren or leave a legacy, it is important to remember that retirement is not the end of your investment journey, but rather a transition into a new, intentional phase of your life. Taking a holistic approach and seeking professional advice will increase your chances of achieving your retirement goals – and your vision for this next chapter in your story.