It’s RA season and many investors are taking steps to top-up their retirement annuities before the end of the tax-year so as to maximise their tax deductions. Given the number of different retirement annuity options to choose from, navigating this area can be a minefield. In this article, we set out the A to Zs of retirement annuities.
There are very few barriers to entry when it comes to accessing retirement annuities. Most LISP platforms have a minimum premium requirement of R500 per month. There are a large number of reputable LISP platforms that offer retirement annuities meaning that South Africans are spoilt for choice when it comes to selecting an appropriate RA.
Ad hoc contributions
Investors are permitted to make ad hoc contributions into their retirement annuities at any time, making them attractive retirement funding options for those who run their own businesses or earn commission/incentives.
Although you will be required to nominate beneficiaries to your RA, keep in mind that the distribution of your benefits in the event of death is governed by Section 37C of the Pension Funds Act. The fund’s trustees are required to identify all those who are financially dependent on you in any way – including spouses, partners, children, siblings or aged parents – and to distribute the proceeds to them accordingly.
You are free to structure your RA contributions in whatever manner you choose. From a frequency perspective, you can choose to invest on a monthly, quarterly, bi-annual, annual or ad hoc basis. Further, you are able to increase, decrease or stop your premiums at any time without fear of penalty or extra costs being charged.
Generally speaking, any funds held in a retirement annuity enjoy protection from your creditors. However, this does not apply to tax owed to Sars or money owed in respect of a maintenance claim.
If you become ill or disabled before the age of 55, you may qualify for early retirement from your RA provided you meet the stringent requirements in respect of permanent disability.
If you choose to financially emigrate from South Africa, you are permitted to withdraw the full amount from your retirement annuity three years after emigration, before age 55, subject to the withdrawal tax tables. You will need a tax clearance from Sars and ensure that your tax affairs are in order.
The funds in your retirement annuity do not form part of your deceased estate and therefore do not attract estate duty. Once the fund trustees have identified your financial dependants, the funds will be distributed directly to them.
You should be aware of the fees applicable, which include the asset manager fee, the administration platform fee and the financial planner fee. High investment fees will eat away at your returns over time, so it is important to ensure that you have full fee transparency when signing up.
Your fund manager is responsible for choosing from a selection of local and international shares which can be included in your retirement investment and actively managed. This is a highly specialised area as the fund manager needs to select the underlying funds that they will best achieve the strategy’s investment mandate over the long-term.
Retirement annuities are compulsory retirement funds and are governed by the auspices of the Pension Funds Act, in conjunction with the Income Tax Act.
A Linked Investment Service Provider is an independent administration company that offers investors access to collective investment schemes across a number of different management companies. LISP platforms can therefore include retirement annuities, unit trusts, endowments and living annuities.
A multi-manager researches and analyses the funds offered by various asset managers and builds a portfolio from these funds in line with a specific investment objective. The multi-manager will invest in specialist portfolios managed by carefully selected managers, following specific or general investment mandates. Due to economies of scale, many multi-managers are able to offer competitive investment fees.
Unlike insurance retirement annuities, there are no penalties or cancellation fees when it comes to unit trust retirement annuities. You are free to stop and start your investment premiums as you like without being penalised.
Regulation 28 of the Pension Funds Act limits the exposure within the RA structure in relation to equities and property. Although often considered to be disadvantageous, this piece of legislation is designed to protect investors against poorly diversified portfolios. In terms of Regulation 28, RA investors are required to limit their local and offshore equity exposure to 75%, while local and international property is limited to 25%, and foreign investments to 30%.
You should receive quarterly investment statements from your provider which sets out all the details of your investment, its performance, returns, contributions and fees, together with investment commentary from the asset management team. Reporting should be easy to understand, transparent, timeous and accurate.
The earliest one is permitted to retire from an RA is age 55, and there is no maximum age at which you need to retire. At retirement, you have the option of withdrawing one-third of the funds in your RA, with the first R500 000 being exempt from tax. The balance of your one-third withdrawal will be taxed as per the retirement tax tables. The remaining two-thirds of your investment must be used to purchase an annuity income in the form of a life or living annuity.
RAs qualify for the same tax incentives as pension and provident funds. This means that you may deduct your contributions to a retirement annuity up to 27.5% of taxable income for tax, bearing in mind that the 27.5% limit applies to the aggregate of premiums to all the retirement funds that you contribute to, with the overall tax-deductible limit being R350 000 per year. Further, retirement annuities are exempt from tax on dividends and interest, and no capital gains tax is paid on investment growth. At the end of the tax year, you can include your RA contributions on your tax return forms and receive a rebate from Sars. Sars has made it a priority to incentivise South African to make adequate provision for their retirement which is why retirement annuities now offer individuals a number of significant tax breaks.
You are permitted to invest up to 27.5% of your taxable income towards an RA on a tax-deductible basis. Over and above your salary, keep in mind that any rental income should be included in the calculation. Further, dividends earned from Real Estate Investment Trusts (Reits) are subject to income tax in your hands and can therefore be included. Gains derived from the realising of capital assets, such as property or discretionary unit trusts, may result in a capital gain. The first R40 000 of capital gain is excluded, and thereafter 40% of the gain is added to taxable income. All interest earned in a tax year is subject to income tax. Currently, the first R23 800 per year in respect of those under age 65 and R34 500 for those older than 65 is exempt. All interest earned thereafter is added to one’s taxable income.
You are free to transfer your unit trust RA to another platform at any stage. This process is governed by Section 14 of the Pension Funds Act and generally takes around eight weeks to complete. There are no tax implications for transferring your RA from one provider to another, and there are no costs involved.
The only time you are permitted to withdraw from your RA is when you retire from the fund, at which point you will be permitted to withdraw a maximum of one-third of the investment, subject to retirement tax tables. The only two exceptions to this rule are in the case of ill-health or disability and financial emigration. If you become permanently disabled, the fund may allow you to retire from the fund early subject to the normal withdrawal and tax rules. Where you formally emigrate from South Africa with tax clearance approval from Sars, you may be permitted to withdraw the full amount in your RA, subject to withdrawal tax tables.