PART TWO – Retirement annuities, benefits and why you need them…
In general, there are many different investment vehicles to use to invest for retirement including pension and provident funds, Tax Free Savings Accounts etc., however I’m going to focus my discussion on retirement annuities, and why retirement annuities should form part of your financial war chest.
Let’s start with, what is a retirement annuity?
It’s a specialised investment vehicle used by individuals to save for retirement in a tax-efficient manner. Retirement annuities are governed by the Pension Funds Act, 1956 and is used to provide funds for retirement, or supplement their current pension/provident funds at work.
Please remember that the implementation of the two-pot retirement system on 1 September 2024, was a real game changer. Please make sure you understand how the different pots work, and affect your retirement now, and in the future.
How does retirement annuities work?
New generation retirement annuities are unit trust -based investments, held in the name of the individual investor, and housed on a LISP platform. This provides flexibility, and an investor can structure an investment strategy, based on the following factors:
- Investment (time) horizon,
- Risk appetite, and
- Retirement goals – in essence, how do you want to spend your retirement.
Other factors could further play a role, and that is why you should speak to a registered independent financial advisor.
Retirement annuities are constrained in terms of Regulation 28 of the Pension Funds Act. This piece of legislation was designed to protect retirement fund members in limiting the extent to which asset managers may investment in a particular asset class, and prevent excessive risk taking – for example:
- You are only allowed to have 45% offshore exposure (including Africa), and
- You are capped in terms of your exposure into equities as an asset class – which is currently at 75%.
When you get to retirement age (early retirement age is age 55, in terms of the Income Tax Act) you are allowed to access your retirement annuity (all the pots), and it works similar to a pension fund.
You can take 1/3rd in cash, if you have a savings pot, (tax is applicable) and the remaining 2/3rd’s will be used to buy you an annuity/income for old age – yes you will still pay tax when you receive a monthly income in retirement.
How much can you invest towards a retirement annuity?
When investing in a retirement annuity, you can invest a maximum of 27.5% of your taxable income per year, capped at a Rand amount of R350 000, on a tax-deductible basis – meaning each year you can claim back the tax on contributions made towards your retirement annuity, up to these limits. I mean who doesn’t like getting something back from the taxman?
Bonus points if you re-invest those monies in a discretionary (after-tax) investment vehicle. Cause guess what, you’ll need lump-sum monies in retirement – emergencies don’t just suddenly stop, they actually get a bit worse. You won’t drive the same car for the next 30 years after retirement.
Also take note of the following – if you have a pension or provident fund, and you contribute additionally to a retirement annuity, a combination of the two cannot exceed 27.5% of your taxable income per year.
Therefore, you cannot claim 27.5% for your retirement annuity and then 27.5% on your pension/provident fund, it’s a combination of the two at 27.5%.
Who should invest in a retirement annuity?
Firstly, anyone can invest in a retirement annuity
A retirement annuity is ideal for people who are self-employed, or for an employee looking to supplement their contributions to their pension/provident funds.
Please make sure you ask your pension/provident fund about additional voluntary contributions, when considering investing more for retirement.
LISP platforms even allow irregular retirement annuity contributions and can be setup for commission earners. There is really no excuse to not prepare for retirement.
What are the benefits of investing in a retirement annuity?
Why should you consider a retirement annuity in your financial war chest:
- Investing with tax-free monies – taxed at pay-out (lump-sum and annuity),
- Exempt from tax on dividends and interest earned in the retirement annuity,
- No capital gains tax on the growth earned on your investment,
- The funds in your retirement annuity does not form part of your estate, and therefore there is no estate duty tax payable – paid to your beneficiaries (Section 37C of the Pension Funds Act),
- You can only access your different pots from age 55 onwards (early retirement age) – and you are provided with a savings pot – which becomes your discretionary (after-tax) monies at retirement and is taxed, based on the retirement tax table,
- Your retirement annuity (including pension and provident funds) is protected from creditors, in terms of Section 37B of the Pension Funds Act – however, if monies are owed to the South African Revenue Services (SARS) or are payable under the Divorce or Maintenance Acts, they will be collected. Ding dong…. (as we just saw with all the IT88 payments made to SARS on the saving pot withdrawals) blink… blink
Whether you take traditional, semi or temporary retirement/sabbaticals, you need money for old age. Don’t put yourself in a position where you don’t have anything and become destitute, live off family or drastically need to reduce your living standards.
Rather make it a happy retirement…