The role of an RA in one’s investment portfolio

While the long-term benefits of investing through a retirement annuity should not be underestimated, there’s a lot more to this retirement funding vehicle that investors should be aware of. In this article, we explore the many benefits of a retirement annuity and how to maximise these benefits in your investment portfolio.

An individual retirement investment

Whereas pension and provident funds are company-sponsored retirement funds, retirement annuities are individual investments available to anyone wanting to save for their retirement in a tax-efficient manner. Retirement annuities are therefore particularly useful for those who are self-employed, who do not have company-sponsored retirement funds through their employer, or for those participating in their employer fund but who want to further boost their retirement savings and maximise tax efficiency. Retirement legislation permits taxpayers to invest up to 27.5% of taxable earnings towards an approved retirement fund on a tax-deductible basis, up to an annual maximum of R350 000, meaning that at the end of the tax year, you can claim back the tax on your RA contributions. Besides the tax-deductible premiums, the funds invested in an RA are exempt from tax on dividends and interest, and no capital gains tax is payable on the growth earned in the investment.

Flexibility and customisation

Housed on a LISP platform, modern retirement annuities provide investors with a wide range of unit trusts to choose from, although it is important to bear in mind that the investment risk within a retirement annuity structure is limited by Regulation 28 of the Pension Funds Act. With its primary purpose being to protect retirement investors against poorly diversified portfolios, this piece of legislation limits, amongst other things, the offshore and equity exposure of retirement funds. While Regulation 28, on the one hand, can be considered a hindrance to investment growth, evidence remains clear that the tax benefits of an RA over the longer term outweigh these limitations. As such, when setting up your retirement annuity, you are free to structure a portfolio that is aligned with your objectives, investment timeline, propensity for risk and the returns needed to achieve your goals. RA contributions also enjoy flexibility in that you can set up monthly, quarterly or annual contributions, and make ad hoc contributions as and when circumstances allow. Notably, there are no penalties for reducing your contributions or stopping them altogether should affordability become an issue or should you need to take a contribution holiday.

Retiring from your RA

The earliest you are able to retire from a retirement annuity is at age 55 (subject to a few exceptions) at which point you have the option of commuting one-third of the fund value in cash with the first R550 000 being tax-free (assuming no previous retirement fund withdrawals have been made). The remaining two-thirds of the investment must be used to purchase an annuity income in the form of a life annuity, living annuity or a combination of the two. While there is no upper age limit for retiring from an RA, there are tax implications that must be considered, and it is always advisable to take a strategic approach to formal retirement.

Retirement annuities in the context of your estate plan

Funds held in retirement annuities do not form part of one’s deceased estate meaning that RAs can play a role in your overall estate plan, although it is important to understand the associated idiosyncrasies. This is because retirement annuities, being government-incentivised funding structures, are designed to encourage individuals to save for retirement thereby alleviating the burden on the State. As a result, retirement annuity death benefits must be distributed amongst those who were financially dependent on you, in whole or in part, at the time of your death. The distribution of the retirement annuity death benefits is strictly governed by Section 37C of the Pension Funds Act to ensure that anyone who was financially dependent on you at the time of your death receives an equitable portion of the funds. As these benefits are distributed directly to your financial dependants in the event of your passing, the funds in your RA will not form part of your deceased estate and are not estate dutiable to the extent that the contributions were tax-deductible. While the funds in your RA are protected from creditors, this protection does not extend to tax owed to SARS and/or maintenance claims.

Transferring your retirement annuity

If you’re invested in a retirement annuity on a LISP platform, you are free to transfer your investment to another investment house or platform for whatever reason without incurring any costs or penalties. The transfer of retirement annuity takes place via Section 14 of the Pension Funds Act and normally takes a couple of months to complete. While legislation permits you to have as many retirement annuities as you like, contributing to more than one RA should be a strategic decision keeping in mind that the 27.5% of taxable income that you are permitted to invest on a tax-deductible basis is calculated as an aggregate across all your retirement annuities and having multiple RAs will require that you keep careful tabs on your investment premiums to ensure that your contributions remain within the tax-efficient level.

As a final word, all retirement annuities are not equal and it is important to understand the fee structure of your RA to ensure that you are not being over-charged, keeping in mind that unduly high investment fees can erode your investment returns over time. Ideally, seek advice from an independent financial advisor with retirement planning experience when structuring a retirement annuity most appropriate for your needs.

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