Research commissioned by Old Mutual indicates that 53% of farmers in South Africa do not accumulate enough retirement capital to retire financially independent from the farming operation, while approximately 13% do not have any form of retirement savings. This means the farm will be expected to financially maintain the incoming and outgoing generations, placing severe pressure on the average farming business. Statistics show that only 30% of family businesses move successfully from the first to the second generation. Koos Nel, head of Agri Market at Old Mutual, says: “There is a direct link between timeous succession planning and retirement savings. Family farmers often start saving too late for retirement resulting in a lack of succession planning.
The sooner the better
“When it comes to retirement planning, the best time as early as possible. Comparing a 20-year old farmer who starts to save R300 per month to retire at 65, to a 45-year old farmer who starts saving R1 000 per month towards retirement, clearly illustrates that the longer the term, the better the return. The 20-year old farmer will pay much less over the term, but will receive much more in return! “Ensure that you do not outlive your retirement income. A financial plan should consider a life expectancy of up to 100 years. It therefore takes careful planning to ensure your retirement income is not eroded by inflation over the years after retirement to maintain an acceptable living standard.”
Nel says farmers can choose from several options in the financial market. Too many options cause confusion, though, and an accredited financial planner can guide the farmer to distinguish between a sound investment and a risky one.
A retirement annuity is an ideal savings vehicle for people like farmers who are self-employed and do not belong to a pension or provident fund.
It offers multiple advantages, such as:
- Growth of the investment is tax-free.
- You may deduct up to 27,5% of your gross remuneration or taxable income (whichever is highest) in respect of your total contributions to a retirement annuity.
- In terms of S37B of the Pension Funds Act, 1956 (Act 24 of 1956) pension assets (including retirement annuities) do not form part of an insolvent estate. Hence the full amount of your fund is protected from creditors, should you become insolvent.
- There is no estate duty on the retirement annuity and the benefit is not taxed in the hands of the beneficiaries.
- You cannot access your retirement annuity before age 55 and at least two-thirds must buy a pension income.
- Attractive tax arrangements for the third you may take in cash, e.g. the first R500 000 is tax free.
Diversify your risk
“Risk and taxation should be taken into account. The lower the risk, the lower the potential return. A diversified portfolio delivers much better results over the longer term than no-risk, interest-bearing investments. Each person’s risk profile and appetite should, however, be taken into account when composing an investment portfolio.”
Old Mutual’s research indicates that only 19% of farmers invest outside the farming operation. Farming is a business with the normal risks of running your own business. Although farmers plough back most of their capital into the farming operation, it is also a sound business principle to diversify risk by investing outside the farming operation, especially in investments that can safeguard your retirement.
The right advice for you
Many uncontrollable variables such as drought can negatively impact on farming and affect the payment of premiums on life assurance and other investments. Farmers should carefully consider their options before reducing or cancelling premiums, as some clients may not be able to obtain new life or disability cover as a result of deteriorated health, or it could simply become unaffordable.
For more information contact Koos Nel, head of Agri Market at Old Mutual, on 082 459 1407 or email email@example.com. Also visit www.oldmutual.co.za/personal/financial-planning/agri. Research information and statistics are available from the author.
Old Mutual Life Assurance Company (SA) Ltd is a licensed financial services provider.