A Retirement Annuity (RA) is a savings vehicle with unique features that will provide you with a regular income upon your retirement.
It is a private pension plan to save for retirement and is the biggest or the only investment for many people.
On March 1, new regulations will come into effect to further protect RA members when at retirement, they are faced with the choice between a living annuity and a life/guaranteed annuity. The new regulations involve a default option which obliges pension funds to make a decision for members who fail to do so themselves. In such a case, the fund must determine whether the member should obtain a life/guaranteed RA.
A “living” annuity is where you, the member, decides how much to withdraw each month and where to invest. When you die, the remaining funds goes to your beneficiaries. On the other hand, a guaranteed annuity involves a fixed monthly income, which is guaranteed and not exposed to market fluctuations. With this option, your beneficiaries mostly get nothing when you die. Any remaining funds are transferred to the insurers.
It is believed that more people might choose to take a guaranteed annuity, although a lower monthly withdrawal rate of about 5% per annum will apply. This is in contrast to a living annuity where a member can withdraw up to 17.5% per annum. The latter often leads to pensioners spending too much money and compromising their pensions.
There is no doubt that for 90% of people a RA may be the most effective way to save for retirement.
While the choice between these two options is critical at retirement, the decision to invest in an RA is just as important and should be made sooner rather than later.
Investing in an RA can ensure that you retire independently and maintain the same standard of living as before retirement.
What makes a RA so attractive?
The contributions to an RA are tax deductible. You can deduct up to 27.5% (with a maximum of R350 000 per year) of your annual gross income against contributions to pension funds, like an RA. Gross income includes all income such as commission, bonuses, overtime, leave fees and even a part of your car allowance.
If you have invested more than 27.5% or R350 000 in a particular year in a RA, you can deduct it in the following years.
SARS pays for you
If your tax rate, for example, is 30%, then you pay effectively 70c for every R1’s investment because 30c is repaid by the SARS when you submit your tax returns. It therefore costs you only R70 for every R100 you save.
Growth and a third is tax free
When you retire, a maximum of R500 000 of your one-third cash withdrawal is tax free. The growth, dividend and interest on funds in your RA are not taxed in your hands either. All investment growth is tax-free which means you should get higher growth in a RA than in a unit trust.
Full amount can be withdrawn
Members who have R247 500 or less in their retirement fund, can upon retirement take the full amount in cash, with no tax liability, provided you have not withdrawn funds from an RA before.
You won’t be able to access your funds until you are 55. This prevents early withdrawals that could compromise your retirement nest egg. In this way you earn compounded growth over a long period of time and are prevented from dipping your hand into the cookie jar prematurely.
Protected against creditors
Creditors cannot seize your RA or annuity, nor can it be offered as security for loans or other debt. If a person cannot meet his debt obligations, or is declared insolvent, all of his assets may be claimed by the creditors other than his retirement and certain long-term policies. This is especially important for people who run their own business where there is a risk of bankruptcy.
Fall outside estate
A RA, living or guaranteed annuity falls outside your estate and a living annuity can be paid directly to beneficiaries at death. No estate duty is therefore payable.
Portable and modern
They can easily be moved from one insurer/product supplier to another and the modernisation of retirement funds makes it possible to adapt an RA to your personal needs.
The reporting process of new generation annuities is very effective with detailed performance and transaction statements sent to an investor every quarter. The investor can therefore monitor the fund value and performance.
However, stay clear from a RA that is:
Linked to death cover because it is taxable, in contrast to a life policy. Beware of a RA in a policy because it usually involves a lot of cost/commissions.
A RA is not for you if you don’t have an emergency fund.
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