The weeks leading up to the end of the tax year are colloquially referred to as ‘RA season’ as this is the period in which investors can make lump sum contributions towards their retirement annuities so as to maximise their tax deductions. But the tax-deductible nature of RA contributions is only one of the advantages of investing in this type of vehicle. In this article, we explore several other reasons to consider investing in a retirement annuity.
Supplement your occupational retirement fund
If you’re currently contributing towards your employer’s retirement fund, you can use a retirement annuity to supplement your retirement funding. While the tax benefits of a pension fund are the same as a retirement annuity, there are advantages to adding a retirement annuity to your suite of investments, specifically when it comes to retiring from your RA. While you will be forced to retire from your pension fund when you formally retire from employment, there is no upper age limit for retiring from your RA. This is particularly useful if you are likely to continue generating some form of income after formal retirement and do not need (or want) to start drawing down from your retirement nest egg. When you retire from your RA or pension fund, you must use at least two-thirds of your invested capital to purchase an annuity income from which you must draw between 2.5% and 17.5% per year – and if you don’t need to draw an income, then keeping your RA in place until you are ready will allow you to keep your money invested for longer.
Contribution roll-over
Contributions to approved retirement funds are tax deductible up to a limit of 27.5% of taxable income, capped at an annual limit of R350 000, but this does not mean that you can’t contribute more without still reaping tax benefits. Every amount that you over-contribute each year will keep rolling over until you formally retire from your RA, and these excess contributions can be used in one of two ways. Firstly, you can use the excess contributions as a tax-free portion to withdraw in addition to your R500 000 tax free amount at retirement. Secondly, you can use it to write off any income tax payable in your living annuity, keeping in mind that income drawn from a living annuity will be taxed at your marginal tax rate.
Complete control over contributions
Contribution flexibility is a huge advantage for retirement annuity investors, especially for those with irregular incomes. RA investors can stop and start their contributions as they choose without any penalties or fees being charged. Contributions can be set up to be paid monthly, quarterly, or annually, and ad hoc lump sum contributions can be made at any stage. This allows investors to begin investing at a level they feel comfortable with and the option to increase their contributions as and when affordability allows. If your personal circumstances change and you find that you are unable to pay your contributions, you can simply instruct your service provider to put your contributions on hold until further notice.
Funds fall outside of your estate
Retirement annuities can be useful when it comes to estate planning because, as in the case of all approved retirement funds, the invested assets fall outside of one’s estate. This means that the money held in a retirement annuity will not be taken into account for the purposes of calculating estate duty, and no executor’s fees will be payable. It is important to remember that it is only the funds that qualify for a tax deduction that will fall outside of your estate. Any over-contributions made will form part of your estate and therefore subject to estate duty.
Protected from creditors
Legislation aims to ensure that the money in your retirement annuity is earmarked for retirement and is protected from creditors. This means that if you become insolvent, your creditors will not have a claim against the funds invested in your RA. That said, keep in mind that there are certain circumstances where your retirement annuity money can be deducted such as if you owe money to SARS or if have outstanding maintenance obligations in terms of the Divorce Act or Maintenance Act.
Disciplined savings
With the invested funds not being accessible before the age of 55 subject to a few exceptions, retirement annuities are great for ensuring disciplined savings, bearing in mind that you can stop and start your contributions at will. The only times that you can access the capital held in an RA is if the total balance of your investment is less than R15 000 or if you retire early due to ill health or permanent disability. Further, if you have been a non-resident of South Africa for tax purposes for an uninterrupted period of three years, according to the relevant South African Revenue Service (SARS) process and criteria, you may withdraw the money invested in your RA.
Multiple retirement annuities
Investors are permitted to take out as many retirement annuities as they like, although note that the tax benefits are calculated in aggregate and not in respect of each retirement annuity, and the tax-free portion at retirement may only be claimed once. Tactically speaking, investors can use multiple retirement annuities to stagger their retirement across a number of investments with multiple living annuity drawdown anniversaries. This can help to create flexibility and options when it comes to drawing a retirement income and ensuring cash flow in retirement.
Invested for long-term growth
Retirement annuities are excellent investment vehicles for long-term growth, especially as the tax advantages compound over time. Remember, besides for the tax deductibility of your RA contributions, retirement annuities are exempt from tax on dividends and interest, and no capital gains tax is payable on the growth earned in the investment. Further, RA investors can structure a portfolio that is completely aligned with their retirement objectives, timeline, propensity for risk and desired investment returns, with the recent changes to Regulation 28 of the Pension Funds Act now allowing greater offshore exposure in retirement funds. Investors can review and rebalance their investment portfolios as their circumstances or objectives change to ensure that the investment strategy is fully customised to their needs.
Reinvesting tax returns
At the end of the tax year, you can include your RA contributions on your tax return forms and receive a rebate from SARS, and this rebate can then be invested in your retirement annuity in the subsequent tax year to further boost your savings.
Have a fantastic day.
Sue
