Why It Pays To Invest in Retirement Annuities

It is almost the end of the tax year. If you have some extra funds available, consider adding to your savings in a retirement annuity (RA) or tax-free savings account (TFSA), thereby enjoying the significant tax benefits these products offer.

Why invest in a retirement annuity?

1. RAs can be viewed as gifts from the taxman.

For example, if you are currently paying tax at a rate of 45% and contribute R100 000 to your RA in the year of assessment, you effectively only contribute R55 000 of the R100 000, while SARS contributes the balance. Tax will be applicable when the funds eventually pay out at retirement, but due to the tax-exempt portion of the lump sum, as well as the tax rebates for individuals over 65 and 75, you will pay less tax at that time.

2. You do not lose your tax benefits, even if you contribute more than the maximum annual tax deduction (excess contributions).

If you contribute more than the maximum (excess contributions), your tax benefit will roll over to the next tax year of assessment. Any excess contributions in subsequent tax years will continue to be rolled over. This means that you could receive a tax benefit at retirement, after retirement or your beneficiaries could benefit when you’ve passed away, as explained in the diagram below.

3. You enjoy estate planning benefits.

  • The RA (excluding excess contributions) is exempt from estate duty.
  • The growth on your excess contributions is not subject to estate duty – you can therefore effectively peg the value of your estate (similar to the benefit obtained from a trust, prior to the introduction of section 7C of the Income Tax Act).
  • Over time, the value of excess contributions could be reduced, which would decrease the estate duty payable on these excess contributions.

4. No tax is deducted within the policy (no capital gains tax, income/dividend withholding tax).

This means you will benefit even more from compounded growth.

5. You remain disciplined with your retirement savings.

You will only be allowed access to these funds after reaching retirement age (currently 55 in respect of RAs).

6. You have protection from creditors.

This means your savings for your retirement will be available when you need them.

RA contributions and tax

*The R350 000/27.5% limit includes member and employer contributions to workplace pension and provident funds.

Key considerations when investing in an RA

  1. RAs are subject to Regulation 28 investment limits. On death of the investor, the Board of Trustees will have full discretion when deciding on a fair allocation of the benefit to dependants and/or nominees, in terms of section 37C of the Pension Funds Act.
  2. There are liquidity restrictions prior to reaching retirement age. This means that unless you qualify for one of the exceptions, you will not have access to these funds before reaching the age of 55.

Written by Ninety One

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