A Fin24 reader who paid R1 500 into a retirement annuity for 15 years recently started a better-paying job, affording him the opportunity to pay extra toward his home loan. Seeking the advice of an expert on whether he should invest more into his retirement or pay his home off sooner, he writes:
I have been paying R1 500 into a Sanlam retirement annuity for past 15 years. It hasn’t grown much. I got a better-paying job two years ago, which has put me into a much higher tax bracket: R423 000 to R550 000 per annum. I'm fortunate in being able to pay an extra R5 000 to R10 000 into my bond every month.
My question is: Should I take a lump sum of about R50 000 out of my bond to put into my retirement annuity to avoid paying higher taxes each year, or just bite the bullet, pay the taxes and try to pay off the bond sooner, which, according to my calculations, will be in nine years' time, instead of 15 years?
Craig Gibson, Investment Consultant at 10X Investments, responds:
The correct starting point to answering your question would be to assess your financial needs and situation. As we do not have all the required information we can provide only general guidelines, not specific recommendations.
Before weighing the pros and cons of paying off your mortgage versus saving more for retirement, it might be worth asking if your existing retirement portfolio is right for you, or if you should make some changes.
The lacklustre performance of a retirement annuity is disheartening. Unfortunately, this is not an uncommon experience for South Africans. Most of the retirement products sold 15 years ago were costly and inflexible compared with what is available today. Chances are that your investment has grown poorly because of high fees and/or poor investment performance.
Getting a clear picture of the fees you are paying is a good first step. You should request an (Effective Annual Cost) EAC statement from the product provider via their customer call centre. EAC is a comprehensive breakdown of advice fees, investment management fees, admin fees and any other fees being charged in your product. Ideally, you should be paying a total of 1% or less per year.
Consider financial advice
The next step is to assess how the funds you are invested in have performed relative to the other options available. You might want to consider consulting a financial advisor.
Once you have a sense of how your retirement annuity is performing, you can apply your mind to your question: Should you save more for retirement and enjoy the associated tax benefits, or pay off your mortgage sooner? Opinions vary on the best course of action, and an individual’s attitude towards money – particularly debt – is a key consideration.
Some people feel that all debt is bad; others believe that there is good debt and bad debt. Almost all agree that expensive debt, such as credit cards, is bad and should be paid down as soon as possible. There is more debate when it comes to mortgage debt.
A private residence typically dwarfs the other investments in investors’ portfolios. For most, it is a single very large egg, as opposed to having many eggs in different baskets. Working towards a more balanced mix of financial and physical assets may be wise, including making sure that you are accumulating sufficient long-term savings to enable an independent, successful retirement.
There is also tax to consider. Given your monthly contribution of R1 500 and current tax bracket, you are contributing between 3.3% and 4.3% of your gross income to your retirement annuity. You are allowed to contribute up to 27.5% per annum tax-free. To give you an idea of the potential tax benefits of contributing more to your RA: If your annual earnings are R550 000 and you are making the maximum contribution it could mean a tax saving of R50 000 per year.
There are many other things one can consider. But whether you decide to pay off your home sooner or lower your tax bill and save for your retirement, a good – probably free - first step is to make sure that your current retirement solution meets your needs.
*Questions may be edited for brevity and clarity.
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