The human race is living longer than ever and needs to have saved up enough money to see us through many more golden years comfortably.
While the government certainly doesn’t have the resources to care for the aged population financially, it makes sense that they encourage us to set some money aside in the form of a Retirement Annuity or ‘RA’. Some may also have an employer who contributes to such a plan monthly.
Understandably, as with any budgeting provision, setting up and continually paying towards an RA requires planning and discipline.
David Higgins, KZN area manager at Ecsponent Financial Services, breaks down the basics you should know about an RA.
What is an RA?
Retirement is defined as the act of leaving your job or ‘ceasing to work.’ An annuity is a fixed sum paid to someone each year, typically for the rest of their life.
This suggests that an RA is a fixed sum that will be paid to you each year after you stop working.
However, there is more to an RA than saving money for your retirement years. There are benefits to an RA that one won’t find with many other investments. These include – but are not limited to – tax advantages, estate planning features, protection against creditors and regulation by government.
How does it work?
Before retirement, you are allowed to reduce your taxable income by up to 27.5% each year by contributing that amount to an RA (or any retirement fund). You may contribute more than 27.5%, but the excess contribution won’t be deductible from that year’s taxable income. Any tax benefit on that extra contribution is deferred and can be used to offset income tax once you start receiving an income from your RA*.
At retirement (any time after the age of 55), you have access to up to one-third of your retirement annuity’s investment value – of which the first R500 000 (currently) will be free from any tax*. The balance of this third (should you withdraw it) will be taxed on a sliding scale as per the example outlined below*:
R0 – R500 000: 0%
R500 000 – R700 000: 18% of the amount above R500 000
R700 000 – R1 050 000: 36 000 plus 27% of any amount above R700 000
R1 050 000 and above: R130 500 plus 36% of any amount above R1 050 000
The remaining two-thirds of your investment value is then used to purchase an annuity and you will need to stipulate how you would like to receive that annual annuity. The conditions are that you take at least 2.5% of the two thirds, but never more than 17.5% each year.
Why choose an RA?
If Jack has a taxable income of R600,000 per year and he has R100,000 left over each year to invest and supplement his retirement, he would be about R37,000 better off each year by investing in an RA over alternative market-related investments*.
|With an RA||Without an RA|
|Gross income||Salary||600 000||Gross income||Salary||600 000|
|Taxable income||500 000||Taxable income||600 000|
|Tax per scale||(93 600 x 36%) + 96 264||129 959||Tax per scale||(49 900 x 39%) + 147 996||167 456|
|Rebates||Primary||12 080||Rebates||Primary||12 080|
|Tax payable||117 879||Tax payable||155 376|
|Tax saved with RA||37 497|
While retirement may be the last thing on your mind if you just entered the workforce or if you are at the peak of your career, it is an essential requirement for all South Africans.
*Disclaimer* – this does, in no way, constitute retirement advice or planning and is merely an illustration. For accurate financial advice on your unique and personal circumstances, contact a professional financial advisor. Request a qualified advisor on this link and one will contact you. Calculations based on tax tables applicable to the publication date of December 2017.