Almost everyone dreams of retirement as a time of peace and relaxation but, in reality, the retirement process is probably the riskiest financial event in your life.
There are two main reasons for this.
Firstly, the decisions you make today will decide the quality of the rest of your life.
Secondly, it is virtually impossible to recover if you make a mistake. By definition this is as risky as it gets.
Unfortunately, most people are shockingly ill-informed about what happens as you enter retirement.
In this article I will try to help you understand the actual process better. This is not a comprehensive guide but rather an outline of what to expect.
Most people entering retirement will be faced with the tedious and often overly complex conversion of a Retirement Annuity into a Living Annuity.
But first, let's take a quick look at what a retirement annuity actually is.
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What is a Retirement Annuity (RA)?
In South Africa, a Retirement Annuity or RA is a vehicle which allows you to save for retirement with “Pre-Tax” money. The tax benefit is limited to 27.5% of pre-tax income or R350,000 per year, whichever is lower.
To get this tax benefit you must comply with the following rules:
1. You can’t withdraw until you are 55 years or older,
2. When you withdraw, you can take 1/3 out as a lump sum payment but the rest must be converted to a Living Annuity (LA),
3. When in an RA you can only invest according to regulation 28 rules. These limit offshore investments and exposure to shares.
Note: There are certain exemptions for very small RA's or disability.
The Conversion: Going from a Retirement Annuity (RA) to a Lump Sum + Living Annuity (LA)
RA's allow you to save but, when you want to start withdrawing the money, you must retire and end the RA.
At this point you can withdraw 1/3 immediately in the form a lump sum payment, unless the RA value is very small. The first R500,000 you withdraw is tax free but please note this amount applies to you and not the particular RA. If you have multiple RA’s you’re still limited to the R500,000.
Also, any retrenchment packages you may have collected may count against this amount as well.
The remaining money must be used for your Living Annuity. The main rules for the LA are as follows:
1. You are no longer bound by Regulation 28 Rules,
2. You can withdraw between 2.5% and 17.5% a year,
3. You pay tax on these withdrawals,
4. You can only change the withdrawal amount once per year,
5. You can withdraw all the cash if the LA falls below R50,000 (and R75,000 if you didn’t take a lump sum).
As I said this serves as a very basic rundown of the process. And, I can hardly explain all the major and minor pitfalls in a simple article. But, the best piece of advice I can give is this, if you are thinking of retiring within the next year, you should begin consulting with an advisor now. The earlier the better!
It is absolutely essential to get the assistance you require BEFORE you retire. The mistakes you make at retirement are the type of mistakes you don’t recover from in this lifetime.
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P.S: If you are retiring and would like to find out more
about the in’s and out’s of the conversion process and how they may apply to your personal situation, feel free to drop an email to me on firstname.lastname@example.org
. Even if you currently have an advisor, given the magnitude of the decisions you’re facing, a second set of eyes could just make the difference.