Retirement annuities: Your questions answered

With a few weeks to go before the end of the tax year, now is the time to maximise your tax-deductible contributions towards a retirement annuity. If you’re new to the world of retirement fund investing and want to know more about retirement annuities, read on.

What is a retirement annuity?

Retirement annuities are specialised investment vehicles designed for individual investors who want to save for retirement in a tax-efficient manner. They are governed by the Pension Funds Act (PFA) and are available as investment vehicles for any taxpayer wishing to fund for retirement or supplement their occupational retirement funds, such as a pension or provident fund.

How do retirement annuities work?

New-generation retirement annuities are housed on LISP platforms and are, as such, unit trust-based investments held in the name of the individual investor. Investors have the flexibility to structure their investment portfolios to ensure that they are aligned with their investment horizon, propensity for risk, and their goals for retirement, although it is important to bear in mind that there are some restrictions imposed by Regulation 28 of the PFA (see below). At retirement, at least two-thirds of the invested capital must be used to purchase an annuity income for retirement.

Who should invest in a retirement annuity?

A retirement annuity is ideal for anyone who is self-employed or for an employee seeking to supplement their contributions to their pension or provident fund in a tax-efficient way. If you’re investing on a LISP platform, you can fully customise their retirement annuity contributions, making this type of vehicle ideal for those with irregular earnings or commission earners.

How much can I invest toward a retirement annuity?

Taxpayers can invest up to a maximum of 27.5% of taxable income per year, capped at R350 000, on a tax-deductible basis. This means that at the end of the tax year, you can claim back the tax on the contributions you made towards your RA up to the above-mentioned limits.

What are the benefits of an RA?

In addition to being able to effectively invest with tax-free money, retirement annuities are exempt from tax on dividends and interest, and no capital gains tax is payable on the growth earned in the investment. Further, funds housed in your retirement annuity do not form part of your estate and are therefore not estate dutiable. With invested funds being inaccessible before age 55, investors can avoid the temptation of dipping into their retirement nest egg prematurely, which is an added advantage.

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How will my money be invested?

As an individual investor, you are free to construct a portfolio that is fully customised to your needs although you will be limited by the provisions of Regulation 28 as mentioned above. This piece of legislation is designed to protect retirement fund members by limiting the extent to which funds may be invested in a particular asset class and preventing excessive risk-taking. For example, Regulation 28 limits offshore exposure (including Africa) to 45% of the overall portfolio, and caps exposure to equities as an asset class to 75%.

Is there a minimum monthly amount that I need to invest?

Most unit trust platforms in South Africa require a minimum contribution of between R500 and R1 000 per month, or a lump sum annual contribution of between R10 000 and R50 000, depending on the service provider.

What happens if I can’t afford my monthly premium?

In respect of a unit trust RA, you can stop contributing to your investment at any time without any fees or penalties. As there is no recoupment period as in the case of insurance RAs, you will not be penalised for stopping or starting your contributions.

What happens if I contribute more than the annual tax-deductible limit?

While your tax-deductible premiums are limited to 27.5% of your taxable income per year and capped at R350 000, this does not mean that you cannot invest more than this in a tax year. Any over-contributions are rolled over to the following year and can be used for tax deduction purposes in that year. The advantage of this is that the over-contributions will still enjoy any potential investment growth tax-free, even though the tax-deductible benefit will only be gained in the following year.

How many retirement annuities can I have?

Investors are permitted to take out as many retirement annuities as they like. However, the tax benefit is calculated in aggregate and not in respect of each retirement annuity. Similarly, the tax-free portion at retirement may only be claimed once. While it may be administratively easier to have only one retirement annuity in place, there are benefits to having multiple RAs in place. For instance, having multiple RAs can allow you to stagger your retirement from your various investments thereby spreading your living annuity drawdown anniversaries across the year, thereby providing flexibility in respect of your retirement income.

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What happens when I retire?

Generally speaking, an investor can only access the funds in their RA from age 55 onwards, with no upper age limit for retirement. When you retire from your retirement annuity, you have the option to withdraw one-third of the investment in cash, with the first R500 000 being tax-free. The remaining two-thirds must be used to purchase an annuity income for your retirement. If you do not wish to make a lump-sum withdrawal, you can choose to purchase an annuity with the full amount, although it is important to first do a retirement liquidity assessment before investing the full amount. When purchasing an annuity income, you can choose between a life annuity (being an insurance policy in the name of the policyholder) or a living annuity (being an investment held in the name of the retiree) or a combination of the two. Several important decisions need to be carefully navigated at formal retirement and this process is best undertaken together with a retirement planning expert.

Can I transfer the funds in my RA?

In general, most retirement annuity funds allow investors to transfer their funds to another retirement annuity. This process will be done in terms of Section 14 of the Pension Funds Act. This means that if you are not satisfied with where and how your retirement annuity is currently invested, you can transfer your funds to another investment platform, with this transfer being tax neutral.

What happens to my retirement annuity if I die?

If you die before retiring from your RA, your death benefits will be distributed equitably amongst your financial dependants by the fund trustees. This means that, while you can nominate beneficiaries to your retirement annuity, these nominations will be used as a guide by the fund trustees when making their assessment. The fund trustees are obliged to undertake an investigation to determine who is financially dependent on you, whether partially or wholly, and to allocate the funds accordingly. Your beneficiaries can take a cash lump sum which is subject to tax as per the retirement tax table and in accordance with your withdrawal history. Currently, the retirement tax table allows for the first R500 000 to be tax-free, with any balance above this taxed on a sliding scale. Alternatively, your beneficiary can use the capital to purchase a life or living annuity and, while no tax will be paid when purchasing the policy, the annuity income will be taxed in the hands of your beneficiary. Your beneficiary can also choose to implement a combination of the above.

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What happens if I emigrate from South Africa?

If you have plans to emigrate from South Africa, it is important that you understand what your relocation means for your retirement annuity. With effect from 1 March 2021, the concept of emigration for exchange control purposes has been phased out and, if you leave the country to take up permanent residence in another country, you will need to advise Sars that you have ceased to be a SA tax resident. In doing so, you will need to request a tax compliance status (TCS) for emigration before being permitted to transfer any funds abroad. That said, you will only be able to access the funds in your RA once you have not been a South African tax resident for an uninterrupted period of three years on or after 1 March 2021. The only other circumstance where you may be permitted to access the funds held in your RA prior to the age of 55 is in the event of early retirement as a result of ill health or disability, although you will need to meet the criteria of permanent disability as set out in the fund rules in order to qualify.

Are the funds in my retirement annuity protected from creditors?

If you are declared insolvent, Section 37B of the Pension Funds Act provides that the funds in your retirement annuity are protected from your creditors, although this does not mean that your RA funds enjoy complete protection from creditors. In terms of the Act, certain monies can be deducted from your pension fund money, including money owed to Sars, and amounts due and payable under the Divorce Act and Maintenance Act.