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Choosing a retirement annuity: what to look out for

Currently, only 6% of South Africans can retire comfortably.

Starting your journey to save for retirement is the first and most important step to building an investment portfolio. Unfortunately, many South Africans are not saving enough for retirement and it is often said that currently, only 6% of South-Africans can retire comfortably. Prioritising your retirement planning is one of the most important life decisions you will ever make! 

As George Foreman said: “The question isn’t at what age I would like to retire, it’s at what income.”

There are a few benefits to including a retirement annuity in your portfolio:

1. Tax savings

The retirement annuity is a personal retirement savings vehicle that offers a number of attractive tax benefits. You can contribute a maximum of 27.5% of your total taxable income/remuneration (capped at R350 000 p.a.) to retirement funds like a retirement annuity (RA) and benefit from tax savings on your taxable income. Investment growth (dividends, interest, and capital gains) in your retirement annuity is tax-free.

2. It also helps you to save towards retirement with discipline. Retirement annuities can only be accessed at age 55, with exceptions to access it earlier, e.g. in the case of permanent disability/emigration. You can make a lump sum, debit order, or ad hoc contributions.

At retirement, up to one- of the total amount can be taken as a cash lump sum, unless the total investment value is below R247 500, in which case it can be taken as a cash lump sum. Currently, the first R500 000 of a lump sum withdrawal is exempt from tax, provided you have not previously made a withdrawal from another retirement fund. The balance of the fund value must be used to purchase an annuity at that time, which will provide you with a regular income, subject to tax where applicable.

A retirement annuity is subject to specific regulations. Your selection of underlying investments will have to comply with the limits set by Regulation 28 of the Pension Funds Act. Regulation 28 limits investment into specific asset classes and is aimed at preventing investors from taking too much risk with their retirement savings. Various asset limitations include a maximum exposure of 75% in equity, 40% in foreign equity (incl. Africa), 30% in foreign equity (excl. Africa), and 25% in property. 

As with any investment product, it’s important to understand that the retirement annuity itself is only the vehicle we are using. There are different building blocks (funds) that can be used to structure the underlying investment itself.

Firstly, you need to choose on which investment platform you want to invest your retirement annuity vehicle in. Here you have a wide range of options – my advice will be to choose a LISP (linked investment service platform) as the fees are transparent and there are no penalties when stopping or starting contributions. Examples of these platforms include PSG Wealth, Allan Gray, and Ninety One. It may also be good to compare the admin fees of a few options.

Secondly, more importantly – the internal structuring of the investment is done by selecting the underlying funds and asset allocation. I would advise working with a financial advisor on this. At PSG Wealth we recommend following a well-diversified, multi-manager approach. It is important to optimise the diversification between the different asset classes (cash, bonds, property, local and global equity exposure) and also combining the different investment styles of different fund managers and investment houses. I believe this makes for a resilient portfolio.

It is important to structure the allocation of your investment according to your age and risk profile. Investing too conservatively at a young age can be just as detrimental to your future as investing too aggressively closer to retirement.

I would advise meeting with a wealth advisor to plan your portfolio holistically. The retirement annuity will play one role in your future planning, but additional planning will also be required: structuring an emergency fund, perhaps ensuring a more tax-efficient portfolio in the long term by using a tax-free investment, planning for risk events (life cover, disability cover, severe illness benefits, and income protection benefits), as well as estate planning  (starting with setting up a will).

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In my experience I’ve found that the tax benefits of an RA are outweighed by the fees of the fund. Also I would not recommend using a financial advisor because as your fund grows they take a portion of the total amount as commission. My financial advisor retired and Liberty Life continued to charge me advisor commission fees despite not having/getting any advice (case opened with the Ombud that went nowhere). The RA vehicle essentially traps your money where you cannot access it, until you are 55, even then you can only take 1/3 in cash. RA’s really are a waste of time. I would not suggest starting an RA if you are entering the job market. Lastly this is not financial advice, you need to make up your own mind and do research of other options.

What you say is true, if you use the old style R A vehicle. Since the days of UAL and TMA this has not been the case (must be 20 years, at least). It’s even better if you do not pay the 3 % for an advisor.

End of comments.

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