Guiding consumers since 2009

The real tax benefits of retirement annuities

By Staff Writer
Nicolette Dirk, finance writer,
With the tax year 2013/14 coming to a close at the end of this month, the  tax benefits of a retirement annuity (RA) should be considered. 
This is according to Nick Battersby, chief executive of PPS Investments, who said there are reasons to consider an additional contribution to your RA before the end of the current tax year.:
It boosts your tax return
Battersby said a portion of the total contribution you make towards your RA in any given tax year is tax deductible. This means that when submitting your income tax return, you can claim back a portion of the money you have contributed towards your RA without impacting the value of your investment. 
“If you choose to invest the money that you are able to reclaim, you are further able to add to your retirement savings without any additional outlay,” said Battersby.
Benefit from further tax advantages 
Returns generated within RAs are not subject to income tax, capital gains tax (levied on profits resulting from the sale of assets such as property or units in a unit trust) or dividend withholding tax (tax levied on dividends received). RAs therefore offer a welcome tax break from the outset.
But Marc Servitz, co-founder of online virtual tax assistant TaxTim, points out that the lump sum you get in the end will however be taxed.
An RA can assist with disciplined investing 
National Treasury estimates that only 10% of South Africans are able to maintain their current quality of life after retirement. To prepare yourself financially for the day you stop working, you need to make sure that you are saving enough and that you stay invested for as long as you can.
Battersby said a regular debit order into a unit trust based RA will ensure that you save in a disciplined and structured manner. 
“These investments still offer the flexibility for you to change or cease your monthly contributions or to transfer to a different product provider without penalty should your personal circumstances unexpectedly change,” he added.
Is a retirement annuity all you need?
Louise van De Merwe, financial planner at Wealthup, said that if you do not expect your RA contributions for the current tax year to reach your maximum tax deductible amount by the end of the month, it may be worth considering an additional RA contribution to do so. 
“Having a retirement annuity does not mean that you have done your retirement planning. You need to have a goal for a specific amount of money at a specific date (your retirement date) as well as a plan on how to achieve that amount. A retirement annuity may or may not form part of that plan depending on your circumstances,” said Van Der Merwe.
Who can benefit from a RA?
Under Regulation 28 of the Pension Act Fund you are limited to 25% offshore exposure and 75% equity exposure. 
“For a young person this is not ideal. Unfortunately regulation is in place to protect investors that are close to retirement,” said Van Der Merwe.
Your money is also locked until you reach the age of 55 so Van de Merwe said you should make sure that you have enough voluntary investments to cover emergencies if you are planning on investing in a RA.
How you can maximise your tax deduction for 2013/14:
RA contributions for the tax year ending 28 February are tax deductible for the greater of:
15% of non-retirement funding taxable income (income not already being used for contributions to a pension or provident fund);
R3,500 less current pension fund contributions; or
R1, 750 with any excess being carried forward to the following year of assessment.

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