Evans writes: I am 30 years old and work as a contract worker, which means my salary is not fixed and ranges from zero some months to R8 000 in other months.

I currently contribute R750 a month towards my retirement annuity and I also contribute R500 a month to a tax-free savings account. I want to increase my savings by R500 per month from next year but I don’t know whether I must increase my retirement annuity, increase my tax-free contribution, or look for another financial product.

Boitumelo Mothoagae, Customer Relationship Manager at Liberty replies:

It is excellent that you are already saving and that you are looking to increase your savings. This means that you are one of the 25% of people in your age group who are saving for retirement. Before making a decision to increase your savings however, you need to look at your overall financial situation.

You indicated that your income is not fixed. Because it is not fixed, you need to ensure that whatever financial needs you pay for each month are covered. Unless you have an emergency fund, this will make it very difficult for you to maintain a savings plan or manage your finances well. For example, during the month when you earn no money you may be unable to pay for any of your living needs as well as your savings. This means that the following month you may have to pay double (ie, for the previous month that you missed payment for and the current month that is due).

If the following month your income is not enough, you may again miss these payments making it very difficult to pay triple the amount required to bring your payments up to date. An emergency fund, which is the equivalent of at least 3 months’ living expenses (and preferably 6 – 12 months), would help you during your months of low income as you would still be able to pay for all your financial requirements.

Draw up a budget

You firstly must draw up a budget to determine what your average income is in a 12-month period and what your expenses are in that period. Your income should then be split as follows:

• 50% for your living expenses (such as rent/bond, food, transport, etc.)
• 15-30% for your savings (such as retirement planning, emergency fund, risk cover, etc.)
• The remainder (20%-35%) can be used for any other financial requirements that you may have (such as entertainment and other non-essentials)

Try and ensure that all your expenses are covered by your average income, and do not require that you use your maximum income (R8 000).

Consult a financial adviser

Once you have your budget set up, go and see a financial adviser who will look at your overall financial situation. They will then determine, based on your input, what your financial requirements are and help you come up with a financial plan suited to your financial needs. For example, you are already contributing 10% of your maximum income to retirement, and in total your saving contribution per month is 16% of your maximum income (R8 000). Therefore, it may not be necessary to increase your retirement contribution as this percentage may be higher for your average income. In addition, because your income is variable, you may want to put your extra savings into a vehicle where the money would be available at short notice, and a retirement annuity will only be available for access at age 55 years if you are healthy.

Your adviser will be able to tell you which savings vehicle is best suited to you. For example, an endowment may not be the best vehicle for you, as the tax rate on it (30% during investment) is higher than your marginal tax rate.

As you indicated above, you are taking advantage of the new tax-free savings plan, where there is a maximum contribution amount (R30 000 annually) that will remain non-taxable. Your current total annual contribution to this is R6 000, so you may increase your contributions to this savings plan without breaching the R30 000 annual cap. However, discuss this with your financial adviser to determine whether this is your best option.

There are various benefits to this tax-free savings vehicle:

• No capital gains tax (CGT) ‒ either when you switch within this account or on withdrawal
• No tax on dividends ‒ your account will earn the gross dividend, which you can then re-invest into the account
• No tax on income ‒ all interest and other income may be re-invested tax-free
• No performance fees or initial fees, though advisers will be able to charge an initial adviser fee agreed with the client
• Service fees ‒ no additional fees will be charged except the annual service fee of the fund selected; this may include a trail fee to the adviser
• Even though the amount of contributions has a lifetime limit of R500 000, there is no limit on the size that this account can grow to. Therefore if invested in high-performing portfolios, the investment may grow to significantly more than R500 000
• Easy access to funds as there is no lock-in period, but be aware that if you withdraw money from the account, that contribution still counts towards your lifetime maximum, so you cannot re-invest it at a later stage.

In closing, consult a financial adviser (you can find a list on the Financial Planning Institute’s website) who will do a full financial needs analysis for you to set up a financial plan that will determine whether you need to increase your savings right now, and if so, which area requires the increase the most. They will also be able to determine the best savings vehicle and the tax implications specific to you.