Planning for Retirement in a Gig Economy

Millennials, Generation Zs and of course the global pandemic have (and still are) fundamentally changing the traditional concept of working a ‘nine to five’. We live in a gig economy; more people opt to freelance (flexible, task-based careers) instead of permanent employment. While this is a viable option for many people, what does it mean for retirement planning?

Freelancer in a gig economy

Gig economy workers are defined as anyone getting paid independently for their knowledge or services. This professional lifestyle also attracts individuals from older generations who want to embrace the benefits of a better work-life balance.

The pandemic has caused many individuals to take their services entirely online out of necessity. It could be argued it’s offered South Africans an opportunity to provide their services to a broader market. With the unemployment rate hitting the 30% mark over the last year, keeping businesses afloat through online activity is a blessing.

With independence comes responsibility

Independence brings a new type of responsibility: you no longer have the luxury of being supplied with work and being looked after through employment benefits such as a retirement annuity and/or medical aid scheme. You are responsible for acquiring your work to earn an income.

Month-to-month financial sustainability can centre around your ability to successfully develop your brand, and building – and maintaining – a sound reputation by continually producing excellent work for your clients. As a result of the responsibilities and circumstances, many gig workers have had to live in the present, putting their financial future on hold.

You oversee your financial retirement plans

Employers often help permanent employees with establishing financial security. The business may set up a retirement annuity fund, pension fund, provident fund, or umbrella fund investment that ensures a portion of employees’ salaries are deducted and paid into the fund before the net amount is paid to them monthly; these benefits do serve as savings vehicles for retirement.

In contrast, gig workers need to be responsible for making their own provisions for their retirement. Individuals may have the mentality that retirement is still far away and start saving later.

However, starting sooner than later can help meet your long-term financial goals significantly when it comes to saving for retirement. There are several products to choose from when it comes to saving independently for retirement, e.g. a retirement annuity or consider a tax-free investment.

Retirement saving and pension planning

Saving via a retirement annuity

A retirement annuity (RA) can be an efficient way to save for retirement. However, there are certain limitations of which you need to be aware.

It’s important to note that you won’t – except under exceptional circumstances such as being disabled and not being able to perform your job anymore – have access to your money until you reach 55 years of age. You can withdraw a third of the investment in cash at retirement. The remaining sum needs to be used to purchase another savings product such as a living annuity that can provide you with a retirement income.

Taking advantage of tax-free investments

Tax-free investments (TFIs) can be perfect products for gig workers because the interest, dividends, and capital gains that compound over time, are tax-free. Furthermore, unlike an RA, there are no limitations preventing you from accessing your investment should you require the funds.

The shortcoming of a TFI is that you can only invest R36,000 per year and R500,000 over your lifetime. Also, you can’t replenish any amounts you withdraw, meaning it may not be enough to meet your savings goal.

Therefore, the gig economy may have its pros and cons, but it’s possible to overcome potential challenges if you’re committed to a reliable, secure retirement plan.