Many of us have been told that to save for the long term, we must belong to a pension, provident, or retirement annuity fund. That’s not necessarily true – not everyone needs to use these traditional retirement vehicles.

Long-Term Saving Isn’t Just About Retirement

Long-term saving is not simply about retirement; it’s about ensuring that you never run out of cash when you need it. There are many ways to save for the long term without belonging to a pension, provident, or retirement annuity fund. The right choice depends entirely on your individual circumstances.

That said, you can only save for the long term if you can afford to. We’ll explore that topic in another blog.

Step 1: Protect Your Income-Earning Structure

The foundation of long-term saving is the protection of your income. Before you can save, you must ensure that your ability to earn an income is secure.

• If you’re employed, your income-earning structure is your job.
• If you’re self-employed or rely on investments, your business or portfolio is your income-earning structure.

Before rushing into long-term saving, make sure you can withstand a period without income. This means having an emergency fund – not for unforeseen expenses, but to cover living costs if your income stops. We generally recommend setting aside enough to sustain you for six months.

The same applies to businesses: ensure your business has enough reserves to weather downturns. Many businesses didn’t survive the initial COVID-19 lockdown because they lacked sufficient reserves. If you run a business, also make sure to separate your business estate from your personal estate (we’ll discuss this in a future blog).

The key takeaway: before investing for the long term, make sure you have the reserves to survive the short term.

Step 2: Protect Your Income

After building an emergency buffer, the next priority is income protection. Beyond savings, an income protection policy is often the best safeguard. These policies typically pay out when you’re unable to work due to illness. The benefit is based on your prior income and stops when you’re deemed fit to return to work.

For business owners, there are also various “loss of earnings” policies designed to protect business income. In short, make sure the income you rely on to build your future is protected.

Step 3: Understanding Long-Term Savings Options

Once your income and reserves are secure, you can focus on long-term saving. Everyone should save for the long term – but that doesn’t mean everyone needs a pension, provident, or retirement annuity fund.

The key difference between these funds lies not in the Pension Funds Act, but in the Income Tax Act. In other words, it’s largely about tax treatment, and it’s crucial to understand how that affects you.

If you earn below the income tax threshold or expect to need your money before retirement age (set by your employer or before 55 if self-employed), you likely don’t need to invest in a retirement fund.

Step 4: Know the Tax Rules

One of the biggest advantages of retirement funds is the tax deduction: you can contribute up to 27.5% of your taxable income, capped at R350,000 per year. Contributions beyond this amount don’t receive additional tax benefits – though you can, of course, save more through other vehicles.

Step 5: Match Investments to Your Time Horizon

Your investment horizon – how long you plan to keep your money invested – determines where you should invest.

• Short-term (under 5 years): stick to cash and bonds. You don’t need a retirement fund for this.
• Long-term (5–7 years or more): consider equities for better growth potential.

Retirement funds are restricted in how much they can invest in equities, but they offer valuable tax advantages if you’re saving specifically for retirement. For most people, contributing up to R350,000 per year to retirement funds and investing the rest directly into equities outside of a retirement fund strikes a good balance. (We’ll explore this in more detail in another blog.)

The Bottom Line

Before joining a retirement fund just because “that’s what everyone does,” make sure it truly fits your situation. Understand your income needs, build sufficient reserves, protect your income, and then, and only then, choose the long-term investment vehicles that best serve your goals.