How to fund your retirement when self-employed

South Africa’s drive to create more entrepreneurs is likely to increase the number of people who are self-employed and such individuals need to be aware of efficient ways to safeguard or fund their retirement.

Charles Lord, Channel Head at FNB Advisory, says being self-employed changes the way an individual should plan for their retirement.

“In most cases, employed individuals have the benefit of making monthly retirement contributions through their employer into an approved retirement fund/plan. This is not the case with self-employed entrepreneurs, especially those in the start-up phase of their business. There could be cash flow challenges which hamper your ability to sustain retirement fund contributions.

“Beyond that, entrepreneurs often see the business as their retirement plan, assuming it will make enough money to secure their retirement or sell it to generate sufficient funds. However, business success is never guaranteed and selling a business is a complicated process that takes time. Not only do you need to find a willing and able buyer, the reality is that future value of the business is not certain. Self-employed or not, you need a reliable retirement investment vehicle.”

The process of selecting an appropriate investment vehicle for your retirement should be determined by your retirement objective. Once you have determined your objective or goal, you can then look at available options and select the best one.

One of the most effective options is a retirement annuity (RA). It is a tax efficient option for people who wish to enjoy a certain standard of living during their retirement. With most retirement investments, you are required to pay capital gains tax but this is not the case with a retirement annuity.

Paying tax on your RA gains is deferred until retirement, meaning there is a larger tax free balance that will continue to compound over the course of your investment. Funding the RA, you will have the convenience of making monthly contributions or make lump sum payments annually.

To ensure that you make the right decision, consider speaking to a professional planner who will conduct a thorough needs-analysis and then provide you with the most appropriate advice for the implementation of your agreed retirement plan.

“Over the years, South Africa has introduced a number of retirement reforms to minimise the risk of insufficient retirement savings facing a number of citizens. Helping more people to accumulate enough retirement savings could alleviate pressure on the country’s welfare budget,” says Lord.