A retirement annuity (RA) has the following characteristics that make it the ideal retirement savings vehicle:

  1. The contributions paid into an RA are tax deductible up to a maximum of 15% of non-pensionable income, so SARS is effectively sponsoring a part of clients’ retirement savings! But what is non-pensionable income? Let us assume for the moment that the client is in full-time employment, and is remunerated by means of a basic salary plus bonuses and commissions. If the client is a member of a pension or provident fund and all of his or her basic salary is pensionable, while commission and bonus are not pensionable, he or she may claim 15% of his or her commission and bonus as a tax-free deduction to an RA. However, if the client is not a member of a pension or provident fund (for example, if he or she is self-employed) all remuneration is non-pensionable, and he or she may claim up to 15% of remuneration as a tax-free deduction to an RA.
  2. RA investment returns are not subject to income tax, capital gains tax or dividend tax. This means no matter how much your clients gain in terms of investment returns, they will not be taxed on any of these gains.
  3. The lump-sum payout at retirement (a maximum of one third of the accumulated benefit) or on death may be tax free within certain cumulative limits that apply to lump-sum payouts from all retirement savings vehicles, which is currently R315 000.
  4. Upon death any benefits paid out from an RA are free of estate duty.
  5. Part of an RA can be used to cover medical expenses when your client retires. After 65 all medical expenses are fully tax deductible.
  6. And last but not least: clients defer the payment of income tax. They are taxed on their regular RA income in the same way they are taxed on their regular pre-retirement income. However, post-retirement income will likely be lower than pre-retirement income, thus bringing along the possibility of being taxed at a lower marginal tax rate.

One thing to remember is that by investing in an RA you are ‘locking in’ the client’s investment until normal retirement age. So the soonest he or she can withdraw anything from the fund would depend on the fund rules, but this is normally age 55.

However, this is not necessarily a bad thing, as the client will not have to exert the self-discipline required not to touch any funds earmarked for retirement, which can happen so easily in a discretionary investment when times are tough.

Now that we have determined an RA is a good vehicle to use for funding retirement savings, the focus must shift to which RA to use.

Registerred Financial Service Provider:Netco Risk Management FSP 40265

  Address:Platinum Junction Park
Milnerton, 7441

Hours of Operation:Mon. to Fri. 9am to 4pm

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