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Should you top up your retirement annuity?

Making additional contributions to your retirement annuity can benefit you greatly. We explore why and when you should consider topping it up.

22 February 2024 · Fiona Zerbst

Should you top up your retirement annuity?

If you receive a financial windfall, such as a bonus or unexpected lump sum, you may want to consider using part or all of it to add to your retirement annuity (RA). This will help you increase your retirement savings without denting your budget.

We explore why, and when, you should consider boosting your retirement savings.

Tip: Our retirement needs calculator can provide insight into how much money you may need in retirement.

Why top up your RA?

Simply put, when you put money into your pension, provident fund, or retirement annuity fund, you pay less tax. 

You’re entitled to get tax relief on contributions of up to 27.5% of your taxable income each tax year when you contribute towards your RA bearing in mind the annual limit of R350,000. 

If you contribute more than the limit, you’ll still get tax benefits, as the additional funds can be offset against tax in following years, notes Buhle Nxumalo, a financial planner at Alexforbes. 

If you were to put additional funds into a unit trust, for example, you wouldn’t enjoy the same tax savings, says Hannah Myburgh, a financial planner at Crue Invest.

“However, you would be able to access those funds if you needed them, which isn’t the case with an RA. Contributions made towards a retirement fund are locked away until you reach age 55, after which you can only access a maximum of one-third in cash,” she notes. 

How do the savings accrue?

Myburgh provides an example of the potential tax saving through an RA.

“If your taxable income for the year is R600,000 and you contribute 27.5% of that amount towards your retirement fund, you would pay tax on R435,000 only, leaving you with a saving of R55,510,” she says. 

This deduction secures you a lower effective tax rate, which means more money flowing into your retirement savings and less to the South African Revenue Service, notes Ryon Phernambucq, an associate financial planner at Fiscal Private Client Services.

“Investments within a retirement fund also enjoy tax-free growth on interest, dividends, and capital, which means optimal growth for your investment capital,” he explains.

Nxumalo says RAs have additional advantages.

“You can continue to save for retirement even if you change employers. Further, money in your RA will be protected from your creditors if you’re declared insolvent,” she says. 

How should you allocate your funds?

Investing in your future is the best gift you can give to your future self, says Phernambucq.

“Making a lump sum contribution can boost your retirement savings significantly, improving your chances of a comfortable retirement.”

However, if you need to build an emergency fund as well, consider contributing via a debit order rather than a lump sum. 

“It’s important to decide what works best for you, especially if you’re anxious about your cash flow,” says Myburgh.

“Start by understanding the reason for your investment. What are you trying to achieve? Then ask your financial adviser how best to allocate your funds towards your respective investments to achieve your goals.”

What are your withdrawal options?

Nxumalo warns that any cash you take from a retirement fund on withdrawal, or receive from a severance package before retirement, will have tax implications. 

“Taking more cash during your lifetime means paying more tax at retirement,” she explains. “It will also reduce your overall pension savings and, of course, retirement income.”

When you retire, you can withdraw one-third of your retirement savings in cash, but you must use the rest to purchase a retirement annuity. 

Tip: It pays to educate yourself about savings and investments – read as much as you can to make informed decisions.

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