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Retirement annuities (RAs) are a fundamental part of retirement planning for many South Africans. They provide a structured way to save for the future, offering several advantages, particularly in terms of tax benefits. This guide will delve into the key aspects of RAs, including tax advantages, contribution limits, withdrawal rules, and more. South Africans are more and more left to save for their own retirement employers are no longer contributing and a retirement annuity fills that gap.
What is a Retirement Annuity?
A retirement annuity is a long-term investment product that helps individuals save for retirement. It is designed to provide financial security by ensuring that you have a steady income stream in your retirement years. The contributions made towards an RA are invested in various assets, which grow over time to build a substantial retirement fund.
Tax Advantages of Retirement Annuities
One of the most significant benefits of investing in a retirement annuity is the tax advantages it offers:
1. Tax-Deductible Contributions: Contributions to an RA are tax-deductible up to a certain limit. You can deduct up to 27.5% of your taxable income or remuneration (whichever is higher) annually, capped at R350,000 per year.
2. Tax-Free Growth: The investment returns within the RA are not subject to tax. This means that any interest, dividends, or capital gains earned on the investment are tax-free, allowing your savings to grow faster.
3. Tax-Free Lump Sum: Upon retirement, you can withdraw up to one-third of your RA as a lump sum. The first R500,000 of this lump sum is tax-free, provided you haven’t used this tax-free allowance before.
Contribution Limits
The South African Revenue Service (SARS) sets specific limits on the amount you can get a tax advantage on.
- Annual Limit: Contributions are limited to 27.5% of your taxable income or remuneration, capped at R350,000 per year.
- Excess Contributions: If you contribute more than the allowed limit, the excess amount can be carried forward to future tax years. These excess contributions can then be deducted in subsequent years.
When Can You Access Your Retirement Annuity?
Access to the funds in your retirement annuity is restricted to ensure that the savings are preserved for retirement:
- Retirement Age: You can access your RA from the age of 55 onwards. At this point, you can withdraw up to one-third of the total value as a lump sum.
- Annuity Purchase: The remaining two-thirds must be used to purchase a retirement income product, such as a living annuity or a guaranteed annuity, which will provide you with a regular income during retirement.
- Early Withdrawal: Early withdrawals are generally not allowed unless under specific circumstances such as permanent disability or emigration.
Frequently Asked Questions
Can I Borrow Money from My Retirement Annuity? We often get the question can I borrow against my Sanlam or Old Mutual retirement annuity?
No, borrowing against your RA is not permitted. The funds are meant to be preserved for retirement, and early access is highly restricted.
Can I Withdraw My RA Before Age 55?
Withdrawals before age 55 are typically not allowed, except in cases of permanent disability or if you have formally emigrated from South Africa.
How Does a Retirement Annuity Work?
Contributions to an RA are invested in a range of assets, including stocks, bonds, and other investment vehicles. The returns on these investments grow tax-free, compounding over time to build your retirement savings. Upon reaching retirement age, you can withdraw a portion as a lump sum and convert the rest into a regular income stream. The rules work the same as a Pension fund.
What Happens to My RA if I Emigrate?
If you emigrate, you may be able to withdraw your RA funds, subject to certain tax implications and regulations.
Can I give the retirement annuity up for security against a loan? No you cannot it is protected against creditors and even against yourself.
When is the best times to invest in a Retirement Annuity?
End of the tax year and if you need to pay in on your tax.
Provisional tax payers when they doing their tax return.
Employees, right now
Choosing the Right Retirement Annuity
Selecting the right RA involves considering factors such as fees, investment options, and the performance of the funds. Some of the top providers in South Africa include Momentum, Discovery, and Liberty each offering various plans tailored to different risk profiles and investment horizons.
Discovery Retirement Optimiser
Discovery's RA plans come with additional benefits such as boosts to your savings for maintaining a healthy lifestyle and proactive financial management. Discovery also have a product called a Discovery Retirement Optimiser ( DRO) taken out with your life policy. A life policy is most families biggest asset and the DRO helps to unlock the value whilst the insured is still alive. If you are interested in the best rather than the cheapest this product is for you.
Conclusion
Investing in a retirement annuity is a smart way to ensure financial security in your retirement years. By taking advantage of the tax benefits, contributing consistently, and choosing the right investment strategy, you can build a substantial retirement fund that will support you throughout your retirement.
By understanding the various aspects of retirement annuities, you can make informed decisions that will help you achieve financial independence and security in your retirement years. Get in contact with AS Brokers so we can assist you with your retirement annuity.
My personal experience as an advisor with retirement annuities. People do not save enough and the investments growth is in many cases very disapointing. With this in mind I did not sell many of them and focussed on helping my clients buy proper insuarance cover and taught them how investments and financial freedom works. My recent article we confirmed that about 90% of South Africans will not be able to retire and it is in line with my own experience.
The problem was the reason for my online course called Solving The Retirement Problem
In my career only a handfull of people managed to save enough for retirement using this vehicle for retirement savings. It should form part of your investment plan and should not be your only plan.
Albert Schuurman
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