Picture this: You're sipping a warm cup of rooibos tea on your veranda, watching the breath-taking Mpumalanga sunset, completely at peace knowing your retirement is well-funded. Sounds dreamy, right? Well, that's exactly what a well-planned retirement annuity (RA) can help you achieve. As someone who's spent years analysing retirement products, I'm here to guide you through everything you need to know about RAs.
What Is a Retirement Annuity? Understanding the Basics
Let's break it down in simple terms. A retirement annuity is like a specialized piggy bank for your golden years. It's a long-term investment product designed to help you save for retirement while offering fantastic tax benefits. Unlike your regular savings account, an RA comes with strict rules about when and how you can access your money – but trust me, these restrictions are there for your benefit.
Here’s how it works:
You contribute money to the Retirement Annuity through a Life Insurance company like Old Mutual or Sanlam or through an Investment Company like Allan Gray, either monthly or through a lump sum, and you can claim back some of this money as a tax deductible up to a certain maximum.
The money grows over time without being taxed on the growth, thanks to compound interest.
You can only access the funds from age 55, although you don’t have to retire at this age. Before 55, you can only withdraw under special circumstances, such as early retirement due to ill health.
Once you access the funds, you can take up to one-third of the amount as a tax-free lump sum, and the remaining amount must be used to purchase a life annuity or invested in a living annuity.
Under the new two pot system, you will also be able to access a third of your RA contributions annually.
Think of a retirement annuity (RA) as your financial best friend who's incredibly focused on one thing: securing your future. It's essentially a long-term investment product designed specifically for retirement savings, but with some impressive tax perks that make it particularly attractive for South Africans
When you invest in an RA, you're essentially setting aside money that grows over time, tax-free. The best part? Your contributions are tax-deductible up to certain limits, which means you're saving for retirement while reducing your current tax bill. Now that's what I call a win-win situation!
My aha! moment
Listen, I'm going to let you in on something that changed my perspective on retirement planning. Last week, I was chatting with my uncle who just turned 65, and his biggest regret? Not understanding retirement annuities earlier in his career. That's why I'm here to make sure you don't make the same mistake.
The Tax Magic of Retirement Annuities
Here's where things get interesting! One of the biggest perks of having an RA is the tax benefits. You can contribute up to 27.5% of your taxable income (capped at R350,000 annually) and claim it as a tax deductible. Let me show you how this works:
Monthly Gross Income | Annual Gross Income | Monthly RA Contribution (15%) | Tax Without RA | Tax With RA | Monthly Tax Saving |
R25,000 | R300,000 | R3,750 | R4,583 | R3,375 | R1,208 |
R40,000 | R480,000 | R6,000 | R9,275 | R6,950 | R2,325 |
R60,000 | R720,000 | R9,000 | R16,458 | R12,875 | R3,583 |
R80,000 | R960,000 | R12,000 | R24,292 | R19,125 | R5,167 |
This essentially means that by contributing R 3750.00 per month towards an RA on a Gross Salary of R25 000 per month, you would be able to claim a refund of R14 496.00 from SARS. Taking into account the magic savings pot you win either way.
To calculate how much you would be able to claim from SARS, use our free Retirement Annuity tax calculator here
Which Retirement Annuity Providers Lead the Pack in 2024?
The "best" Retirement Annuity depends on your individual needs and financial situation. Here are some factors to consider:
Fees: Look for providers with competitive and low fees, as these can significantly impact your savings over time].
Investment Options: Choose a provider that offers a range of investment options, such as equity funds, balanced funds, and fixed-income funds, to align with your risk profile and investment goals.
Flexibility: Consider RAs that allow flexible contributions, so you can increase, decrease, or pause your payments as needed.
Performance: Opt for providers with a good track record of investment performance. For example, 10X Investments highlights their consistent market outperformance and low fees.
In the bustling South African market, several providers stand out for us:
Old Mutual: Known for their stable returns and excellent customer service
Sanlam: Offers flexible investment options
Momentum Metropolitan: Vibrant ecosystem and respectable financial services brand
Discovery: Innovative rewards program
Allan Gray: Competitive fees and consistent performance
Retirement Annuity vs. Pension Fund: Making the Right Choice
Here's something most financial advisors won't tell you upfront: you don't have to choose between an RA and a pension fund - they can work together beautifully. While pension funds are linked to your employer, RAs give you complete control and flexibility.
Feature | Retirement Annuity (RA) | Pension Fund |
Eligibility | Anyone can contribute, regardless of employment status | Only available through employer |
Contributions | Flexible contributions, can be changed or stopped anytime | Fixed percentage of salary, usually mandatory |
Employer Involvement | No employer contribution required | Employer typically contributes a percentage |
Tax Deductibility | Up to 27.5% of taxable income (capped at R350,000 annually) | Up to 27.5% of taxable income (capped at R350,000 annually) |
Access to Funds | Annual access through the two pot system | Annual access through the two pot system |
Investment Choice | Wide range of investment options, more flexibility | Limited to options chosen by employer/fund trustees |
Regulation 28 | Must comply with Regulation 28 investment limits | Must comply with Regulation 28 investment limits |
Portability | Fully portable, stays with you regardless of employment | Tied to employer, must be preserved or transferred when changing jobs |
Cost Structure | Individual retail rates, typically higher fees | Group rates, typically lower fees due to economies of scale |
At Retirement | Maximum 1/3 can be taken as cash (subject to tax), 2/3 must be used to purchase an annuity | Maximum 1/3 can be taken as cash (subject to tax), 2/3 must be used to purchase an annuity |
Estate Planning | Forms part of your estate for estate duty purposes but exempt from estate tax | Doesn't form part of your estate, distributed according to Pension Funds Act |
Your Questions About Retirement Annuities Answered
Is it Worth Having a Retirement Annuity?
Yes, having a Retirement Annuity can be very beneficial for several reasons:
Tax Efficiency: Contributions to RAs are tax-deductible, which can lower your taxable income and reduce your tax liability[1][2][5].
Protection: Your RA savings are protected by law, meaning they are safe from creditors and your own temptation to spend the money before retirement[1][4][5].
Compound Interest: The money grows tax-free, allowing you to benefit from compound interest over the long term[1][4][5].
Flexibility and Customization: You can customize your contributions and investment strategies to fit your financial goals and risk profile[1][2][4].
Are Retirement Annuity Payments Taxable?
When you start drawing income from your Retirement Annuity after age 55, the payments are subject to tax, but there are some tax benefits:
Lump Sum: You can withdraw up to one-third of your RA value as a tax-free lump sum up to R500 000.
Annuity Income: The remaining two-thirds must be used to purchase a life annuity or invested in a living annuity, and the income from these annuities is taxable. However, this income is taxed at your marginal tax rate at the time of withdrawal, which may be lower in retirement.
Smart Strategies to Maximize Your Retirement Annuity
Start early: The power of compound interest is your best friend
Maximise tax benefits: Consider toping up before tax year-end
Diversify your investments: speak to your financial planner
Review regularly: Annual check-ups keep your retirement strategy healthy.
Looking ahead, the retirement annuity landscape is evolving. Digital platforms are making it easier than ever to manage your RA, while new investment options are opening up exciting opportunities for growth.
Ready to take control of your retirement future? The best time to start was yesterday; the second best time is today. Speak to a qualified financial advisor from Lebon Consulting today.
Comentários