The past few decades have seen a rise in the popularity of new-generation retirement annuities which, being housed on LISP platforms, offer investment flexibility, greater transparency and reduced investment costs. Unlike old-school insurance-based retirement annuities, owners of retirement annuities housed on LISP platforms can invest towards a unit trust portfolio with a number of notable advantages. These new-generation RAs offer full transparency when it comes to fees and investment reporting, together with generous amounts of investment and contribution flexibility. With advisors being remunerated on the basis of a professional fee as opposed to an upfront commission, unit trust retirement annuities make excellent long-term investment vehicles worth incorporating into your portfolio.
As in the case of provident and pension funds, retirement annuities are governed by the Pension Funds Act and are tax-efficient investment vehicles designed for individual investors and employees who wish to supplement their workplace retirement fund or invest for their retirement in their personal capacity. Investors have complete flexibility to determine their own contribution plan – with monthly, quarterly, annual or ad hoc contributions being possible – making it ideal for those who earn irregular commissions, incentives or bonuses. With invested funds being inaccessible before age 55, investors can avoid the temptation of dipping into their retirement nest egg prematurely.
Except in the case of ill-health or emigration, investors can only retire from a retirement annuity from age 55 onwards, although they are entitled to stop contributing towards their RA at any stage without fear of early termination fees or penalties. There is no maximum age at which you need to stop contributing to your RA or by which you are required to access your funds. Once you decide to retire from your RA, you may withdraw up to one-third as a cash lump sum, while the remaining two-thirds must be used to purchase a compulsory annuity. On passing, your death benefit will be allocated by the trustees of the fund in terms of Section 37C of the Pension Funds Act which means that, while your nominated beneficiaries will be taken into consideration by the fund trustees, it is their duty to distribute the funds equitably amongst your financial dependants.
Since 1 March 2016, retirement annuities qualify for the same tax incentives as pension and provident funds. This means that you may deduct your contributions to a retirement annuity up to 27.5% of taxable income for tax, bearing in mind that the 27.5% limit applies to the aggregate of premiums to all the retirement funds that you contribute to, with the overall tax-deductible limit being R350 000 per year. Further, retirement annuities are exempt from tax on dividends and interest, and no capital gains tax is paid on investment growth. At the end of the tax year, you can include your RA contributions on your tax return forms and receive a rebate from SARS. SARS has made it a priority to incentivise South Africans to make adequate provision for their retirement which is why retirement annuities offer individuals significant tax breaks.
It goes without saying that high costs have a negative impact on investment growth and that this, in turn, is magnified as costs are compounded over time. Traditional retirement annuities have archaic cost structures which are often difficult to understand, whereas unit trust RAs provide a clear breakdown of costs so that the client has full insight into how their money is being invested and what fees are being charged. While insurance RAs are notorious for their complicated actuarial calculations and lack of feedback regarding investment performance, unit trust-based RAs provide transparent breakdowns of fund performance and transactions.
Unless you are emigrating or qualify for early retirement due to ill health, you will not be able to access the money in your RA prior to retirement making it a safe haven for money intended for the long term. Unit trust retirement annuities are flexible by design in that they allow you to structure a portfolio from a selection of underlying unit trusts. You are free to amend your contributions as often as you wish, transfer your investment to another platform or stop contributing altogether – with no costs, penalties, transaction or associated fees being charged.
Most investment platforms in South Africa offer the solution for a portfolio manager to choose a selection of local and international shares which can be included in your retirement investment and actively managed. As portfolio management and the selection of the underlying unit trusts is a specialist field that requires expertise in investment capability, research and skill, this function can be outsourced to a discretionary fund manager who, because of economies of scale, very often offers competitive investment fees. Bear in mind, however, that any RA is subject to Regulation 28 of the Pension Funds Act which means that your investment will be subject to certain restrictions in terms of asset classes and risk exposure.
With so many advantages, retirement annuities as long-term, tax-efficient investment vehicles are difficult to ignore and are worthy components of a carefully structured investment portfolio. In trying economic times, channelling funds towards a long-term investment may require some budget manipulation – which is easier to undertake if you consider the ultimate goal of a financially comfortable retirement.
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