Planning for retirement in the gig economy
Millennials are revolutionising the way we work as they embrace the flexibility and independence of the gig economy, but what does this mean for their retirement planning? In the spirit of youth month, and in the interests of starting retirement saving sooner rather than later, it’s a good time to reflect on the importance of making provisions for the future.
The term has been around for over a decade, but has gained momentum over the last couple of years, as people increasingly choose flexible, task-based engagements as an alternative to full-time employment. Aptly coined “the gig economy”, this way of making a living is becoming a viable option for many: from highly trained professionals on long-term contracts, to people offering their time and skills on temporary, ad hoc bases. Gig economy workers are therefore defined as anyone getting paid for their knowledge or services independently.
Millennials make up the majority of gig workers, but this work style is also attracting other generations, who desire increased flexibility, a greater work-life balance, and more independence than traditional employment offers. Others choose to work in this way to supplement their regular income: Less clandestine than the traditional notion of moonlighting, overt or subtle “side-hustles” are becoming a popular way for workers to boost their earnings during tough economic times.
The gig economy is supported – and in some cases, driven – by technology. Digitisation makes it viable for any individual to offer virtually any service to anyone else, even across borders and currencies. Digital platforms facilitating this exchange include the likes of Uber and global freelancing platform, Upwork. Often no personal employer-employee contact is involved in the transaction.
In some countries, this is clearly more advanced than others. As a reference, the Intuit 2020 Report estimates that by next year, contingent or per-project workers will comprise over 40% of US workers. Although the majority of South Africans are still not as digitised as workers in many other countries, our online access continues to grow. The gig economy presents us with prospects of offering our services to a much wider marketplace – which intuitively feels like an invaluable opportunity for a country with a high unemployment rate.
With independence comes responsibility
Individuals working in the gig economy basically operate as small independent companies. The traditional notion of being “looked after” by one’s employer does not apply in this new way of working. Instead, you assume the responsibility of securing your own work, developing your brand and building your professional reputation through social and professional networks.
Independence is key to gig workers, and it is accepted that responsibility is a necessary aspect of being one’s own boss. Of course, while much of the responsibility is bound up in producing excellent output and securing future work, there is another vital element of responsibility. It’s an element that many gig workers may be at risk of deprioritising, yet is one that should absolutely not fall by the wayside: It is the responsibility of planning for your retirement.
Your retirement plans are your own concern
In the traditional employment model, employers typically take care of individuals’ retirement savings by setting up a retirement fund and ensuring that a portion of everyone’s salary is deducted and paid into the fund before their salary is paid over to them. While employer-sponsored retirement plans may not be enough to ensure a comfortable retirement, this arrangement does make sure that some provision for retirement is made.
This is not the case for gig economy workers. Within this new work style, it is entirely up to you as your own employer to make provisions for your retirement.
Although many of us may feel that retirement is still a long way off, the number one rule of retirement saving pervades: It is never too soon to start. In fact, the sooner you start, the greater the probability you will meet your long-term goals.
As a gig worker or entrepreneur, your income is more likely to fluctuate than it might in traditional employ. This makes it even more important to hold fast to the notion of yourself as a mini-company with financial responsibilities to maintain, through times of both feast and famine. Employers need to continue to pay their workers in tough months as well as good ones: Independent workers should follow suit, striving to maintain a steady contribution to their own retirement savings at all times.
There are a number of products to choose from when it comes to saving independently for retirement. You can invest in a retirement annuity, save directly into unit trusts, or consider a tax-free investment.
Saving via a retirement annuity
Retirement annuities (RAs) provide an effective way to save for retirement in your individual capacity. In many ways a retirement annuity is a portable, personal pension plan: it is yours for life. You enjoy some flexibility in choosing the underlying unit trusts – although the retirement fund regulations limit how much exposure you can have to equities, property and offshore assets – and you can usually stop and start contributions as you need to, without penalty. It’s important to be aware that you can’t touch the money until you retire (except under specific circumstances, for example if you become permanently disabled), but neither can your creditors, which is reassuring for anyone working independently or running their own business.
For those craving tax efficiency, RAs also offer some relief. Your dividends, interest and capital gains that you earn while invested are not taxed. In addition, you can deduct your RA contributions (up to the value of 27.5% of the higher of your taxable income or remuneration, capped at R350 000 per year) from your total taxable income, and may therefore pay less tax.
And when you’re ready to retire (anytime from age 55), you can withdraw up to a third of your investment in cash. The rest must be used to purchase a product that can pay you an income in retirement, such as a living annuity or a guaranteed life annuity.
Taking advantage of tax-free investments
Tax-free investments (TFIs) are great products for long-term saving because, like RAs, your dividends, interest and capital gains that compound over time are not taxed. This gives your investment the ability to generate greater returns on its growth over time. There are different types of tax-free investments – look for one underpinned by unit trusts that offer good potential long-term returns.
Unlike RAs, you make contributions using your after-tax income and can access your investment whenever you like. On the downside, you can’t invest more than R33 000 a year or R500 000 in total during your lifetime, which may not be enough for your retirement savings goals. While you may be comforted that you can access your investment if you need it, you should be aware that you can’t replace any amounts you withdraw.
Saving directly into unit trusts
Direct unit trust investments offer choice, flexibility and easier access to your savings, but lack the credit protection of RAs and the tax benefits of both RAs and TFIs. Investing in unit trusts for retirement requires discipline: it can be tempting to dip your hand into the cookie jar. However, you can invest as much as you want to into the asset classes of your choice.
Make the gig work for you
The gig economy brings evident benefits: work-life balance and the power to steer one’s own career. But as noted in a recent study of 65 gig workers, conducted by researchers at the Cornell SC Johnson College of Business, not having the support and security of an employer can trigger feelings of anxiety and precariousness.
These potential challenges can be overcome, if you are committed to building each aspect of your own mini-company, including ensuring that you create a solid and secure retirement plan. We recommend consulting a good independent financial adviser who can help guide your retirement planning.