Nosipho Nhleko, Lead Specialist for Investment Propositions at Liberty

New data from Liberty, suggests that many South Africans may not be differentiating between investing towards retirement versus investing towards other goals.  This has the potential to undermine their long-term financial security.

According to an internal study by Liberty, clients who invest in general investment products are significantly less likely to purchase Retirement Annuities (RAs). In fact, 79% of clients who hold investment products with Liberty are not invested in retirement-specific solutions, highlighting a gap in understanding around the distinct roles these financial tools play.

“It isn’t very clear why this is the case, but it is possible they may be trying to invest for their retirement using other investment structures, and this is not very efficient,” says Nosipho Nhleko, Lead Specialist for Investment Propositions at Liberty.

“It is important to note that while investing for goals such as your children’s tertiary education differs significantly from investing for retirement, they both involve planning and discipline but require a different approach in terms of time horizon, risk tolerance, and the overall investment strategy and investment solutions.”

The difference between investing in your goals and investing for your retirement

She says investing for your short to medium term goals such as buying a home or funding your children’s education entails thinking about the investment solutions that will allow you to meet your desired investment goals within the time limit that you have to achieve the goal; whilst also requiring one to be able to easily access the fund when the time comes. Additionally, one might want to think about an investment solution that can preserve your capital and give moderate growth.

In comparison, investing for retirement is entirely different as this is a long-term goal that often spans decades and involves building a sustainable income stream that may need to last 25–30 years post-retirement.

This calls for a longer-term view, because ultimately the timeline allows for investors to ride out market ups and downs, focus on inflation protection, and enjoy the power of compound interest over decades. Retirement Annuities are specifically designed to meet these needs.

“It becomes clear that the investment solutions for each of these scenarios needs to perform differently to give the most effective desired outcome.  This is why people need to think differently about investing for their short- and medium-term goals as against investing for their retirement,” says Nhleko.

Why RAs are unique

Some clients may be concerned that they cannot withdraw easily from their retirement funds.

“The two-pot system has introduced new reforms. A third or all your contributions made after 1 September 2024 will automatically placed into a ‘savings pot’ which can be accessed once a year.”

But Nhleko says the biggest advantage that many do not always realise with retirement savings is that they can potentially provide significant tax savings.

“Money that is put in a retirement fund, such as a retirement annuity that is deducted from your earnings lowers your overall tax burden. Contributions up to 27.5% of your earnings can be deducted, subject to an annual deduction cap of R350,000.  So, if you earn R40 000 a month, and put R6000 into retirement that retirement annuity, you only pay tax on the remaining R34 000.”

And most importantly, she says, is that the growth on the savings in your retirement annuity is not taxed, unlike normal investments. There is no tax on capital growth, dividends or interest income in the retirement annuity which can have a significant positive impact in growing your retirement savings. You will only pay tax when the benefits are paid to you from your retirement annuity

“When considering the advantages of certain investments over retirement savings, people really need to consider these benefits in the long-term. The monthly tax savings alone represent a substantial financial advantage,” she says.

“It’s really worthwhile for anyone saving towards retirement to get familiar with how a retirement annuity can benefit them.  They have been proven to work well in the long run; they still remain the cornerstone of intelligent and holistic retirement planning.”  Concludes Nhleko.