As we reach the end of the tax year, you might be thinking about how you could increase your tax rebate from SARS for an extra influx into your pocket, especially with swirling rumours on the possibility of potential tax hikes to be announced in the budget speech on the 21st of February.
Retirement annuities provide just the right vehicle to not only generate larger yearly rebates as a tax incentive but was primarily instituted to help you save toward your eventual retirement and maintain your standard of living when you no longer have capacity, capability, or mere drive to continue working.
Before we get into all the benefits let us first delve into what a retirement annuity is.
What are Retirement Annuities?
Retirement Annuities (RA’s) are a subset of Retirement Funds (along with Pension Funds, Provident Funds and Preservation Funds). They serve as private pension policy, taken out to provide retirement benefits if you do not belong to an occupational fund, or if you want to make additional provision when you do belong to an occupational fund. You can make recurring and/or lump sum contributions, or a combination, which will be tax deductible up to certain limits (we will get into this a bit later). RA’s can also receive transfers from another approved fund, which will be a tax-neutral transfer. When you reach the age of retirement, normally 55 years or older, you qualify for retirement benefits (unless you become disabled where you might access that capital sooner). There is however no maximum retirement age, making it possible to retire whenever you see fit after 55. In essence, the main objective of a retirement fund is to provide retirement benefits at retirement.
What happens when I reach my Retirement Age?
When you reach your desired retirement age you can opt to take up to one-third of the retirement value in the form of a lump sum (of which R500 000 would be tax free if you had not yet made previous withdrawals). The balance must be used to buy a compulsory pension with. The choice of annuity to buy a compulsory pension consists of two options:
1. A Life Annuity:
Offers you a pension guaranteed for your lifespan, based on the annuity rates applicable on the date of purchase. This pension ceases at death (if no period guarantee is selected), and subsequently your capital is lost.
2. A Living Annuity:
Does not offer any guarantees, but instead offers an opportunity to invest the purchase sum in a portfolio of underlying collective schemes. You must take an income of between 2.5% and 17.5% per year of the fund value. At your death the living annuity does not cease like the life annuity does but can be transferred to your nominees who has a choice of either continuing receiving an income or commuting all or part of the investment value to a lump sum.
Benefits of a Retirement Annuity:
If you want to save for retirement in a tax-efficient manner, with flexible investment choices, you cannot go wrong when choosing a retirement annuity. Not only is the money in the RA protected against creditors (in accordance with Section 37A of the Pensions Fund Act), but it is also protected against early withdrawals to help achieve your, as you currently cannot access the money before 55 (the two-pot system might change this fact).
1. Compound growth:
The money you contribute toward a retirement annuity is invested in underlying unit trust funds, managed by professional fund managers. This provides the convenience of exposure to the assets of your choice (be it equities, property, offshore assets, bonds, or cash), without having to buy those assets yourself. This also provides access to investment expertise through these professional fund managers carefully manage your chosen investments following a proven investment philosophy. The culmination of these factors results in growth on your investment, continually compounding to grow your money and not just keep it safe boosting your savings toward retirement.
2. Tax efficiency (Section 11 (F)):
A retirement annuity is tax efficient because of the RA contribution, tax deduction available. You can claim a deduction on the total contributions you make to any pension, provident or retirement annuity fund during the year of assessment (subject to a maximum of the lesser of 27,5% of your annual income and R350 000). This can be calculated by multiplying your contributions to the retirement annuity (subject to the limits) with your marginal tax rate (the highest tax rate applied to any part of your income). For example, if you are earning R360 000 per annum your marginal tax rate would be 26% (see SARS tax tables). If you had subsequently contributed R24 000 for that year of assessment, you would be eligible for a rebate of R6 240 straight back into your pocket.
It is also tax efficient as, in accordance with Section 37B of the Pensions Funds Act, when you reach retirement and transfer your full retirement benefit to a post-retirement pension, that transfer will incur no tax.
Furthermore, retirement annuities also do not accrue capital gains tax meaning that the growth of your investments is not subject to tax.
3. Protection from Creditors (Section 37A of the Pensions Fund Act)
According to Section 37A of the Pensions Fund Act (also covering retirement annuities), retirement fund benefits cannot be reduced, transferred, or pledged to creditors for an amount exceeding R3 000. Thus, creditors can only attach up to R3 000 of your retirement funds. In addition to the above, Section 37B of the Pensions Funds Act stipulates that pension funds do not form part of an insolvent estate.
Conclusion
Retirement annuities are a valuable tool if you are looking to save for retirement while also maximizing your tax benefits. By contributing to a retirement annuity, you can reduce your taxable income, potentially increasing your tax rebates and lowering your overall tax liability. This can be especially beneficial for those in higher tax brackets who are looking to save for retirement in a tax-efficient manner.
Additionally, retirement annuities provide a means for individuals to save for retirement while still maintaining their current standard of living. By making regular contributions to a retirement annuity, you can build up a nest egg that will provide you with a steady income stream in retirement. This can help ensure that you are able to maintain your desired lifestyle even after you have stopped working.
By taking advantage of the tax benefits and savings opportunities offered by retirement annuities, you can set you and your family up for a secure and comfortable retirement.