We all know that having a retirement annuity (RA) helps us to retire comfortably and with dignity. But what many people fail to recognise are the tax benefits that are linked to an RA.
We spoke to experts to help you identify these benefits, and take advantage of them.
Tip: Learn how to invest in an RA.
RA boosts your tax return
Nick Battersby, chief executive of PPS Investments, says 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.
The more you save, the less tax you pay
Your salary will be taxed at lower rates because of the contributions you make towards your RA. According to the law, you can contribute up to 27.5% of your income to your retirement fund, but your total contribution can’t be more than R350,000 a year.
For instance, if you earn R400,000 and contribute 12% of your income to your retirement fund, your taxable income will be R352,000 and your annual tax will be R61,343, leaving you with R290,657. However, if you increase your retirement contributions to 14% of your income, your taxable income will be R344,000 with an annual tax of R58,866 and your take-home pay will be R285,134. In other words, you’ll pay R2,477 less on tax when you increase your retirement contributions.
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.
However, Marc Sevitz, co-founder of online virtual tax assistant TaxTim, points out that the lump sum you get in the end will be taxed.
The first R500,000 that you withdraw from your retirement savings is not taxed, but any lump sum that you take after that will be taxed at an incremental rate.
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 says 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 change unexpectedly,” he adds.
Is a retirement annuity all you need?
Louise van der Merwe, financial planner at WealthUp, says that if you don’t 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.
“Having a retirement annuity doesn't 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,” says Van der Merwe.
Who can benefit from an RA?
Under Regulation 28 of the Pension Fund Act, you're limited to 25% offshore exposure and 75% equity exposure.
“For a young person, this is not ideal. The regulation is in place to protect investors that are close to retirement,” says Van der Merwe.
Your money is also locked until you reach the age of 55, so Van der Merwe says you should make sure that you have enough voluntary investments to cover emergencies if you’re planning on investing in an RA.