Retirement annuities: 10 things worth knowing

From tax advantages and disciplined savings to investment growth potential, retirement annuities can be effective for housing one’s retirement funds. There are, however, complexities to be navigated when investing through a retirement annuity, some of which are unpacked below.

  1. You can transfer your insurance RA to a unit trust platform

If you have a traditional, insurance-based retirement annuity in place, it’s important to know that you can transfer your policy to a unit trust platform, although it is advisable to first understand if your insurer will charge any cancellation fees for doing so. The process of transferring a retirement annuity from one service provider to another is governed by Section 14 of the Pension Funds Act and can take a number of months to complete. If you’re contemplating such a move, your financial advisor should request costs from your current insurer and prepare a cost-benefit analysis for you so that you can make an informed decision. If you transfer your RA to a LISP platform, no expensive upfront commissions will be paid to your financial advisor as in the case of an insurance RA, and your advisor will earn an advice fee that is charged per annum as a percentage of your invested capital.

  1. You can use an RA to preserve your retirement benefits

While a preservation fund is an excellent place to house the proceeds of employer-sponsored funds, keep in mind that it is not the only option available. Transferring your group retirement benefits into a retirement annuity structure has significant advantages which  should be weighed up against the unique features of a preservation fund. Specifically, if you transfer your funds into a retirement annuity, you are able to keep contributing towards the investment on a regular or ad hoc basis, whereas, in the case of a preservation fund, no additional contributions can be made. That said, whereas a preservation fund permits one full or partial withdrawal before the age of 55, you will not be able to access the funds in your RA before the age of 55.

  1. You can invest in as many RAs as you like

You can open as many retirement annuities as you like, although you need to be clear on reasons for doing so. Remember, you are permitted to invest up to 27.5% of your taxable income on a tax-deductible basis towards an RA, with this limit being applicable to the aggregate of all your contributions towards an approved retirement fund, meaning that there is no tax advantage to having more than one retirement annuity. If your RA is invested on a LISP platform, you can fully diversify your investment strategy, subject to the limitations of Regulation 28 of the Pension Funds Act, within a single retirement annuity, meaning that additional retirement annuities will not create opportunity for extra investment diversification.

  1. RAs are more tax-efficient than TFSAs

When it comes to tax on investment returns, retirement annuities and tax-free savings accounts present the same tax efficiency for investors in that no tax is payable on any dividends or interest earned in either an RA or a TFSA, and there are no capital gains tax consequences. The major difference between the two investment structures is that your contributions towards a retirement annuity are tax-deductible up to 27.5% of taxable income, whereas your contributions towards a tax-free savings account are made with after-tax money. As such, tax-free savings accounts become attractive investment vehicles once you’ve maximised your tax-deductible contributions towards an RA.

  1. The funds in your RA are protected from creditors

Section 37B of the Pension Funds Act provides that the funds in your retirement annuity are protected from your creditors in the event of insolvency, although this does not mean that your retirement annuity funds enjoy complete protection from creditors. In terms of the Act, certain monies can be deducted from your pension fund money, including money owed to SARS, and amounts due and payable under the Divorce Act and Maintenance Act.

  1. Your over-contributions will roll over

While your tax-deductible premiums are limited to 27.5% of your taxable income per year up to a maximum of R350 000, keep in mind that you are not prevented from investing beyond this threshold. Any over-contributions made towards your retirement annuity will be rolled over to the following year where they can be used for tax deduction purposes in that year. The advantage of this is that the over-contributions will still enjoy investment growth, even though the tax benefit will only be gained in the following year.

  1. The funds in your RA are not subject to estate duty

Funds invested in an approved retirement fund, such as a retirement annuity, do not fall within your deceased estate and the value thereof is not taken into account when calculating estate duty. As such, retirement annuities can be used effectively to reduce estate taxes although one should be cognizant of the effects of Section 37C of the Pension Funds Act on the distribution of retirement annuity death benefits and your overall estate plan which is elaborated upon in point 10 below.

  1. You can use your RA to reinvest your tax refund

A beneficial way to use your retirement annuity is to reinvest the tax refunds you receive from SARS. At the end of the tax year, you’ll need to submit your IT3 certificate to SARS as part of your e-filing providing proof of the contributions made towards your retirement annuity in that tax year. When you receive your tax refund from SARS, you can invest the money back into your RA by way of an ad hoc contribution, thereby further boosting your retirement savings.

  1. You can stop contributing to your RA without being charged penalties

A notable feature of LISP-based retirement annuities is that they are transparent, flexible investments that, unlike insurance-based RAs, allow investors to completely customise their contributions. This means that you can choose to contribute monthly, quarterly, bi-annually or annually, plus the option of making ad hoc contributions as and when circumstances allow.

  1. Your RA death benefits are distributed in accordance with Pension Funds Act

As mentioned in point 7 above, the funds held in your retirement annuity will be distributed amongst your financial dependants in the event of your passing as per the provisions of Section 37C of the Pension Funds Act. This section of the Act places a duty on the retirement fund trustees to establish the identity of your financial dependants at the time of your death and to allocate the benefits accordingly.

Have a super day.


Let's talk

For a free consultation with no obligations, please fill in your details and we will contact you to set up a meeting.