DALL-E 3
Is 2025 the year you’ll take charge of your retirement savings? Whether you’re investing for retirement, or spending your retirement savings, this is your guide to key concepts and terminology. Be empowered to make informed decisions about your financial future.
Asset allocation
The is the process of dividing your investments among different asset classes to balance risk and return.
Asset classes
Retirement products in South Africa typically invest in a diversified range of assets to balance risk and return. Asset classes are broad categories of investments with similar characteristics. Common asset classes include:
- Equities (Stocks): Represent ownership in a company. They offer the potential for high returns, but also higher risk.
- Fixed-income (Bonds): Debt securities issued by governments or corporations. They generally offer lower returns but lower risk compared to stocks.
- Cash and cash equivalents: Low-risk investments like savings accounts and money market funds.
- Real estate: Includes physical property like homes, commercial buildings, and land.
- Commodities: Tangible assets like gold, oil, and agricultural products.
Compound interest
The interest earned on both the initial principal and the accumulated interest over time.
Diversification
Spreading investments across various asset classes to reduce risk.
Fees
Retirement products involve fees to cover the costs of managing and administering your investments. These fees include:
- Management fees: Charged by investment managers for overseeing your investments.
- Administration fees: Cover the costs of running the fund, such as record-keeping and customer service.
- Platform fees: Charged by the platform that hosts your investment, covering technology and infrastructure costs.
- Advisory fees: If you use a financial advisor, they may charge a fee for their advice.
For a detailed breakdown of fees, view our fee glossary here.
Guaranteed annuity
You typically purchase a guaranteed annuity when you retire and want a fixed income for the rest of your life. It offers security and predictability but lacks flexibility and potential for growth.
Inflation
The rate at which prices for goods and services increase over time. To maintain the purchasing power of your retirement savings, it’s crucial to invest in assets that can outpace inflation. This means your investments should grow at a rate higher than the inflation rate. If your investments don’t keep up with inflation, the value of your savings will erode over time, reducing your purchasing power in retirement.
Living annuity
A flexible retirement product that allows you to invest your retirement savings and choose how much income to withdraw annually. It offers investment control but carries the risk of outliving your savings. You purchase a living annuity when you retire and want greater control over the management of your retirement savings.
Liquidity
The ease with which an asset can be converted into cash.
Non-pensionable income
This is the part of your salary that is not used to calculate your pension or provident fund contributions. It generally refers to ‘extras’ like bonuses, overtime pay, and allowances.
Pensionable income
This the portion of your salary that is used to calculate your pension or provident fund contributions. This typically includes your basic salary and sometimes commissions.
Pension fund
A pension fund is a workplace-based retirement plan that provides a regular income upon retirement. When you retire, you can choose to receive a full pension or a combination of a pension and a lump sum. Pension funds offer tax benefits, allow for additional contributions, and can be transferred between employers.
Preservation fund
A preservation fund safeguards your workplace retirement savings during job changes or unemployment. While you cannot make additional contributions, you can access your funds once you reach 55.
Provident fund
Unlike a pension fund that pays out a regular income, a provident fund provides a cash lump sum upon your retirement minus the tax payable. This employer-sponsored plan also allows additional contributions and provides potential death and disability benefits.
Regulation 28
This refers to the (legally binding) set of rules designed to protect your retirement savings. It limits how much your retirement fund can invest in certain assets, such as shares and property, to reduce risk. This ensures your money is spread across different investments, helping to safeguard your future.
Retirement annuity (RA)
A long-term investment product designed to help you save for retirement. Contributions are tax-deductible, and earnings grow tax-free until withdrawn in retirement. You can also invest in RAs after you retire – to reduce your taxable income until you’re ready to spend your savings.
Risk tolerance
An individual’s ability to withstand market fluctuations and potential losses.
Two-pot system
The two-pot system divides your retirement savings into two parts: a savings pot and a retirement pot. The savings pot, holding one-third of your contributions, can be accessed annually before retirement for emergencies. The remaining two-thirds in the retirement pot is locked away until retirement. The two-pot system applies to pension funds, provident funds, pension preservation funds, provident preservation funds, and retirement annuity funds. Remember to consider the tax implications of withdrawals.
Withdrawal strategy
A plan for withdrawing funds from retirement savings to ensure a sustainable income stream.
Retire blog
Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, Carina Jooste responds to common retirement questions, ranging from which products are best suited to different circumstances to efficient tax treatments.
