Saving for retirement
Saving for your retirement is essential and a retirement annuity can help you invest for your future. But RAs also offer additional benefits you may not be aware of.
Whether you’re considering a retirement annuity (RA) as your sole vehicle for saving for retirement or as a supplement to your company pension or provident fund, an RA helps to maximise your investment and make the most of your retirement.
Benefits of Saving for Retirement with a Retirement Annuity
When saving for retirement, an RA provides the following benefits:
1. No tax (almost)
You can deduct up to up to 27.5% of contributions to your RA from your taxable monthly income. This means you’ll only be taxed on the remaining amount – your earnings minus your RA contributions.
In addition, your investment returns are also tax free, helping you to grow your money faster. And because paying tax on your proceeds is deferred until your retirement, there’s a larger balance that’ll compound, tax free, for as long as you keep your money invested.
2. Regular retirement income
At retirement (or when you turn 55), you can withdraw up to one-third of your savings out as a cash lump sum (tax free, if the amount is below R500 000). As per the regulations on retirement annuities, the remaining amount must be transferred to a Living Annuity account and will be used as your monthly pension.
Before the age of 54 a person can’t access their retirement annuity unless they are:
- Permanently disabled
- The investment value across all their investments is less than R7 000
After 55, you qualify for early retirement and are entitled to a tax-free lump sum of R500 000. Should you wish to draw more than R500 000 you will pay 18% tax.
The two-thirds of your savings will become a living annuity. This will be taxed if the income exceeds the following tax thresholds:
- If you’re younger than 65 – R75 750 per annum
- If you’re between 65 and 75 – R117 300 per annum
- Person 75 and above – R131 150 per annum
3. Safe and sound
Your creditors can never touch your retirement annuity if you become insolvent. No-one, other than you and your chosen dependents, can have access to that money. Even if you have no discipline, your retirement annuity will ‘save you from yourself’, as you cannot access it until you are 55. That means your savings will only be available when they are most needed and for what they are intended: your retirement income.
Also, should you pass away, your beneficiaries can choose to receive a share of your RA as a cash lump sum or as an annuity, or a combination of the two. The annuity income will be taxed according to the current income tax table. Cash lump sums will be taxed according to the retirement lump sum tax table.
4. Flexible payments
You can make monthly contributions, add a lump-contribution (salary bonus or tax return) or, if needed, pause or even stop your RA deposits at any time without significant impact on your investment value. But try to keep your contributions regular, no matter how big or small.
5. Diversified portfolio
Having an RA gives your investments access to different asset classes and geographical regions. But before making any final decisions, it’s always worth speaking to a professional financial planner about your options.