With “RA season” in full swing, many investors are asking whether retirement annuities are still worth it with all the speak of prescribed assets and imminent legislation changes.
The debate is quite hot. As with most things, you will have to look at your own situation, and more importantly, evaluate your personal financial discipline before you will know whether an RA is for you or not. Today we will try to filter through the noise and hopefully help you to decide for yourself.
Before we go into the legislation changes and uncertainty, let’s refresh on why you should consider a retirement annuity right now:
RAs are by far the most tax-efficient investment you can make. Not only are you allowed to deduct your contributions to your RA from your annual taxable income (up to certain limits), but the growth in your RA is 100% tax-free. No income tax on interest earned, no dividends withholding tax and no capital gains tax when you switch portfolios or when you withdraw.
There will be some tax on the lump sum that you receive when you retire, but this can be completely avoided by taking less than R500 000 as a lump sum (in your lifetime) and amounts thereafter will be taxed on a reduced scale relative to income tax:
Yes, there is that 1/3 restriction limiting how much you are allowed to take from your RA as a lump sum overall, but when you weigh up how much tax you are saving, it may just be worth it.
Compulsory commutation of 2/3rds of your benefit to an annuity;
This is where the debate goes crazy! How dare government prevent us from using our own hard-earned savings any way we want to? Well, you can’t have your cake and eat it. RAs are a completely voluntary investment. If you want to enjoy the tax benefits mentioned above, you have to give back something to the government. By forcing you to convert 2/3rds of your investment to a lifetime income, the burden of having to finance your retirement is removed from government.
While it is our natural instinct to resist being told what we may and may not do, just think about it for a minute…is receiving an income after retirement such a horrible thing? Yes, it may be that your income will be too small to finance your lifestyle and you would have preferred to receive the full amount in cash to use as you please, but let’s face it – that would just delay the problem by a few months. The problem here is not lump sum vs income, the problem is that you haven’t saved enough. Leading me to the next benefit…
No access to the funds until you are 55
At the risk of reminding you of your parents, this rule really is one of those “for your own good/you’ll understand when you’re older” situations. Unfortunately, we see it happen all too often that entrepreneurs (the people that RAs were originally designed for) withdraw from their discretionary investments to push money into struggling businesses that eventually fail in any case. Investors find many “good” reasons to use their savings long before retirement because saving for something years into the future is much less urgent than spending the money now. This restriction forces you to at least keep something for retirement.
Retirement annuities may be very restrictive when it comes to access, but they definitely help with the problem of spending too much too soon in life.
Below are a few other benefits:
You can invest a lump sum, or debit order, or a combination of the two. Contributions can be decreased, increased or suspended in line with your current financial situation.
Protection against creditors
Unlike other discretionary investments, creditors may not attach your RA when things go wrong in life.
But what about all the talk of changes to Regulation 28, prescribed assets and changing legislation?
What we know
Emigration as a concept is to be phased out by March 1 2021, as part of an effort by National Treasury to liberalise exchange controls and encourage South Africans to return after their travels abroad. This phasing out of emigration has had the consequence that the trigger for cashing in a retirement annuity will no longer exist. From March 1 2021 onwards, a member will be required to show they have been a non-resident for an uninterrupted period of three years to qualify to cash in their retirement annuities.
So, if you are currently still living in SA, but planning to emigrate soon, your ability to withdraw your RA benefit in full will be delayed by three years from the date you eventually leave the country. Anyone planning to emigrate, should therefore not consider topping up their RA this year.
Rumours and speculation
The issue of prescribed assets has been on the ANC radar since 2017, but as things stand at the moment, Minister of Finance, Tito Mboweni has been working hard to allay fears of the imminent implementation of prescribed assets. He has openly spoken about amending Regulation 28 of the Pension Funds Act, specifically to include construction projects in the category of immovable assets.
It is important to understand that Regulation 28 does not force retirement fund trustees to invest minimum amounts in any asset class. Quite the opposite, it limits the maximum amount of exposure that a retirement fund may have to any particular asset. It seems a bit optimistic that this amendment would achieve an increase in investment into construction projects, but according to Mboweni, “all we wanted to do, [is] try to unlock in the minds of investment managers that they can invest a percentage of their investable funds in infrastructure”.
One can’t help but be reminded of the saying “where there’s smoke, there’s fire”. I can’t imagine a government in the world that has not thought of how many problems they can solve if only they could force private citizens to invest in their sanctioned projects. The backtracking from looking at the viability of prescribed assets to just considering a small change in Regulation 28 during the emergency budget speech, indicates that (so far), ours is taking notice of the immense opposition they will face from their already weary citizens. Having said that, the issue of some members of government (and even some opposition parties) pushing for prescribed assets is a concern that we can’t ignore completely.
Does it mean that RAs are now rendered useless and too big a risk? We definitely don’t think so. If you are not saving enough for retirement, have some spare cash and could use a deduction from your taxable income, go ahead and make that contribution before 28 February 2021!