Retirement Annuity (RA) is retirement saving that people can use to purchase retirement income through a living annuity or a guaranteed life annuity.
By: Alex Odendaal
With only 2 weeks to go before the end of the 2024/2025 tax year, there is a window of opportunity for taxpayers who have not yet maximised their tax-deductible retirement fund contributions to set up an RA. If you’re a first-time RA investor, here’s what to know about these highly tax-efficient retirement funding vehicles:
Tax-deductible contributions: As an RA investor, you can contribute up to 27.5% of your taxable income towards a retirement annuity, capped at a maximum of R350 000 per year, on a tax-deductible basis, meaning you can reclaim the taxes paid on your RA contributions when submitting your eFiling.
Tax-free investment growth: Over and above this tax benefit, note that you will not be liable for tax on dividends and interest earned in your RA, and no capital gains tax will be applied to your investment growth.
No barriers to entry: Setting up an RA is relatively straightforward with minimal barriers to entry. Modern retirement annuities are housed on a LISP platform, offering investors a diverse selection of unit trusts, with minimum monthly contributions ranging from R500 to R1 000 depending on the platform.
Investment flexibility: RA investors have flexibility to design a portfolio that aligns with their retirement objectives, investments horizons, risk tolerance and required returns. This customisation allows them to select underlying funds and asset allocations tailored to their individual needs.
Regulation 28 restrictions: With the above in mind, note that the investment risk within a retirement annuity structure is regulated by Regulation 28 of the Pension Funds Act, which aims to protect retirement investors from poorly diversified portfolios by imposing limits on offshore and equity exposure within the fund. While Regulation 28 may appear to hinder investment growth, the long-term tax benefits of an RA significantly outweigh these restrictions, providing substantial advantages for retirement planning.
Flexible contributions: When it comes to RA contributions, investors can elect to invest on a monthly, quarterly, bi-annual or annual basis, and are able to start and stop contributions at any time without incurring penalties or administrative charges.
Estate planning benefits: RAs make effective estate planning tools as the proceeds in the investment fall outside of one’s deceased estate and do not attract estate duty (to the extent that the premiums were tax-deductible) or executor’s fees. However, it is important to note that RA death benefits will be allocated to those who are financially dependent on you, wholly or in part, at the time of your death in terms of Section 37C of the Pension Funds Act.
Protection from creditors: Also important to know is that funds held in a retirement annuity are generally safeguarded from creditors, although this protection does not extend to taxes owed to SARS or legitimate maintenance claims.
Retirement age: The earliest an investor can retire from an RA is at age 55 years, meaning that investors cannot access their retirement funds prematurely, subject to a few exceptions such as permanent disability or emigration. Further, there is no upper age limit for setting up a retirement annuity although bear in mind that an RA should be integrated into a well-structured retirement plan taking into account the tax implications of withdrawals, future cash flow requirements, and any existing retirement funding vehicles that you may have in place.
Transferring your RA: If you’re invested in a unit trust-based RA, you have the flexibility to transfer your investment to another investment house or platform without incurring any costs or penalties.
Multiple RAs: You are able to set up as many retirement annuities as you like, although keep in mind that the 27.5% of taxable income you can invest on a tax-deductible basis is calculated collectively across all your RAs, and you will need to carefully track your investment contributions to ensure that you remain within the tax-efficient limits. However, should you find self- over-contributing in a particular year, the over-contribution portion will simply carry forward into the next tax year for tax-deductible purposes.
* Odendaal is an associate financial planner at Crue Invest.
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