Let SARS help you fund your retirement
There are so many pension and retirement products out there, it's a minefield. It's difficult to know which option suits you best. If, like many South Africans, your employer doesn't provide a pension package or you're self-employed, a Retirement Annuity might be the perfect retirement tool for you…
Retirement Annuities (RAs) were first introduced in South Africa in 1960 as a way to encourage people to start saving for their retirement. It’s basically a savings plan with tax advantages.
What’s great about RAs is they’re flexible. You can increase and decrease the amounts you save.
But before you throw your life savings into it, remember, you can’t draw any benefit until the age of 55. It’s also worth bearing in mind that you can’t contribute to a RA past the age of 69.
RAs are similar to defined contribution pension schemes as the pension pay-out depends on investment performance. That’s why the asset management companies spend so much time highlighting this in their marketing material.
With RAs, your contributions partner isn’t your employer, but the taxman explains the research team at The South African Investor
Three reasons why a Retirement Annuity may be perfect for you
RAs are useful if:
You don’t have a pension scheme through your job, or
You want to supplement your employer’s pension fund.
In the case of a company scheme, your maximum tax deduction for a retirement fund from pensionable income is 7.5% – i.e. if your pensionable income is R100,000 per annum, you can deduct R7,500 from your income so that you’ll only be taxed on R92,500.
In the case of retirement annuities, your tax deduction allowance doubles to 15% from any non-pensionable income. If you’re paying into a company pension fund, you can still claim an amount of R1,750 per year.
Two bonuses of using a RA to save for retirement
There are two main advantages to saving for retirement using a RA:
Tax on your RA is deferred until the day you retire, so you’re not losing part of your capital each year.
RAs aren’t considered part of your estate, so if you go bankrupt your creditors can’t attach this money.
The government taxes RA funds at 0% for both income and capital gains purposes. This is because the money can only be assessed at age 55 or older and only one third of the amount can be taken.
The balance must be used to buy an annuity.
It’s a good idea to start a RA when you start working. If you’ve been working for many years, take the time to have a good look at your pension scheme and check if it’ll cover your requirements at retirement. If it won’t, take out an RA to supplement your retirement income.