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Can I retire from just one RA?

Reporting on this RA is poor and I would like to retire early and turn it into a living annuity, or preserve it.

I recently turned 55 and plan to continue working until I am 65. I have a number of retirement annuities (RAs) and preservation funds at different providers. Is it possible to retire from one RA only? I have been contributing to this RA since 1987. Reporting on this RA is poor, and I would like to retire early and turn it into a living annuity, or preserve it. The paid-up penalty is 30%, which, although allowed, I am unhappy with, as all fees and commissions surely must have been recovered after 30 years.

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Sadly, the older RAs provided by life assurance companies, while providing tax benefits on contributions, were not investor-friendly. They typically had high costs, poor investment options and large penalties for discontinuing them or making them paid up. Fortunately, modern RAs provided by some respected investment houses as opposed to life assurance companies, don’t carry these burdens.

To answer your question: yes, you can retire from any one RA independently of any other retirement fund.

However, a 30% penalty is very hard to make up for through either increased performance or lower costs in an alternative arrangement.

If you were to have the RA paid up (with penalties) and formally retire from it i.e. turn it into an annuity, you would be able to take up to one-third as a cash lump sum. This amount will be taxed according to the retirement tax table as seen below.

Source: Milpark

If one was to retire from multiple retirement funds (RAs, pension funds, etc.) at different points in time, whilst taking a lump sum from each of them, then the lump sums would be aggregated to determine the applicable amount to apply to the above tax table. I strongly recommend that you get personalised advice on this before you decide to do anything, and ideally you want a tax directive from Sars to confirm the position.

The rest of your financial circumstances may impact this decision of whether to take a lump sum on retirement or not. There is a benefit to having discretionary funds as well as structured retirements funds as the one is treated differently to the other from a tax perspective. A mixture of both a discretionary fund and a retirement fund can help to maximise the tax efficiency of the overall portfolio and provide future financial flexibility, depending on your requirements.

If you were to have the RA policy paid up and formally retire from the fund then two-thirds of the fund would have to be converted into either a living annuity or guaranteed annuity. If you were to choose a living annuity then you are forced to take an annual withdrawal of between 2.5% and 17.5%. It is important to note that this is fully taxable as income in your hands.

With a penalty of 30% one could assume that the maturity date would be quite a few years away. I would recommend that you find an independent advisor who is able to manage the investment and report to you on the performance each year.

After the maturity date (provided that the policy isn’t rolled over) you have the following options:

  1. Leave it paid up, as is.
  2. Transfer it to a better service provider at no cost (a Section 14 transfer) – where it remains as an RA until you wish to retire from it.
  3. Exercise a retirement option with or without a lump-sum withdrawal, and turn it into an annuity with a better service provider.

It may be preferable from a reporting perspective to have all the retirement annuities and preservation funds transferred to one service provider where it can be more efficiently managed and reported on to you.

With 10 years to retirement you should probably be maximising your contributions to a retirement savings pool rather than retiring from a policy and triggering potential tax consequences and penalties.

The graph below shows the power of compounding over time. The years preceding retirement can account for a large portion of the return that the investment has generated over time. This would support the notion of leaving the RA to compound tax free over the next 10 years provided that the underlying selection of funds consists of top managers with long-term track records of consistent outperformance.

Source: Milpark

 

It is worth noting that every investor should seek personalised retirement advice well before their retirement date. It would be well worth your while to have an independent advisor take you through a detailed investment planning exercise in which they illustrate the amount of capital needed at the age of 65 in order to generate a sustainable income in retirement. They would then be able to show you a potential shortfall which you could address over the next 10 years.

Many an investor tends to base their retirement contributions on what their budget allows them to contribute comfortably without affecting their lifestyle. Contributions should be based on a sound financial plan for the future rather than a current lifestyle budget.

  

ADVISOR PROFILE

Jesse Morgans

Asset Protection International

COMMENTS   12

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Is there anyone here who as actually retired with only a RA and maintained a reasonably comfortable life?

Well, if they retired recently, there is good change they were in old evil life insurance RAs which underperformed due to excessive costs, at least in the beginning of their work life, so there is that to also consider in any answer.

New RAs are much more flexible and cost effective (the ones not from life insurers, the Echo Bonus one for example has fees of over 3.5%), when I retire in 15 to 20 years I’ll be able to answer your question lol.

Noted. We can compare notes in 20 years time. First beer is on me.

I give equal importance over RA’s vs UT / ETF’s (ignoring property). There’s still a massive benefit in RA Funds, that most forget: tax savings.

Assuming if one’s RA Fund had zero fund growth since inception (which is absurd to mention) people easily forget that the combined income tax you pay on your RA annuity income (or pension fund income for that matter) during your retirement years, is generally way less, than all the tax-refunds you received in your working life contributing to it. (The Govt knows they lose out in this regard, but then Govt knows you’re another person ineligible for state-pension, as you have your own funding.)

Reasons are: (i) while you contribute to an RA, the tax-refund is calculated on your marginal tax bracket. And for most people, you earn higher income (and pay a higher rate rate) during your productive career/working life, and during retirement years….the annuity income is typically lower (due to insufficient savings / we live longer, etc)…and likewise the tax on your pension income, is calculated at lower rate you pay SARS back.

(ii) Come 65-age, there’s additional age-rebate and favourable medical-rebate formula, that drops the effective tax rate for pensioners even further.

(iii) The first R500,000 on any pension/provident/RA Fund lump-sum is tax-exempt, despite that it was built up over one’s working life using tax-deductible contributions.

It will be difficult to calculate (due to effects of inflation) the “real terms” tax savings received during contribution years vs paid paid back upon receiving pension/annuity income. I guess such combined tax-saving is probably bigger than the actual RA policy growth(?) No other investment has such advantage. (And IF one becomes in financial trouble, with the Clerk of the Court knocking on your front door, they can repossess anything in your name…property/cars/furniture/bank balances/ unit trusts / ETF’s…but they cannot touch your RA or Pension-fund savings. You can have a few million of capital in a RA fund…it’s protected by law. Well, until you reach retirement age, at least.)

Hence, so called “poor” returns on RA Funds?? With tax arbitrage. Think again…
I’ll join you & Supersunbird for a beer! It will be on you 😉

A suggestion for the Reader asking the question:

Find out from the provider of the RA if they will allow you to move your RA to another one of their platforms/products with no penalty (they might offer newer style RAs or similar).

When I was 20 I took out my first RA for R6 through Sanlam this was more than 40 years ago. A year later I took out one for R8 paid these
monthly through my salary. These were extra because my work had a pension fund.
When I turned 30 I made these paid up because I smoked more than R14 a day.
When I turned 55 I cashed in there were no penalties because you can at age 55. The amount I received was R75000 seventy thousand rand with no tax deducted.

Well with this princely sum you could almost pay for your smoking habit (if still smoking) for a year.
Old order RA’s were/are atrocious – I used to increment my RA annually for the last 15 years of my working life and the total sum would not have bought a decent motor vehicle, move the LA to another more cost effective company and am trying to grow the capital by drawing down 2.5% annually

The question should not be “can I retire from one RA Fund”, but rather ask “is the fund-value in my RA sufficient enough”? (to sustain your lifestyle through your retirement years).

(..the SARS R500,000 exemption on one-third withdrawals is a lifetime aggregation, so it doesn’t matter if you have multiple funds, or a single one).

You’ll never make up such a large early-withdrawal penalty you mention, hence best is to STICK to the 65-age maturity date (check your policy, as the max maturity date could well be signed up for 69-age), and possible that your advisor (back in ’87) may’ve maximised his commission, as such RA Funds could’ve been signed up to 55-age lowest maturity age. (Your advisor would’ve received less comm at the time, but now your RA plan could’ve been commission free by now if you want to continue contributing. Water under the bridge.)

Perhaps, having the yearly contribution-esclation % to be cancelled (i.e. 0% premium increases from now to the final maturity date) should not trigger any penalties. (Then you can invest the difference in another product to make up for no inflation increases in premiums).

Supersunbird makes a great suggestion: see if you can “convert” your existing RA Fund into the “newer generation” RA product range within the same insurance house. And continue investing.(I converted my geriatric Old Mutual Flexi RA into their latest Max Investment platform. Less fees & more investment portfolio choice).
You can also do a Section 14 transfer to another insurance company’s latest RA product, but I doubt if the cost will be worth it (new commissions?)….just convert from your 1987 Toyota Cressida to the latest 2018 Toyota Auris/Corolla (instead of moving the old car to a new VW or Ford 😉 …which will perform the same as a new Toyota. Get my drift?)

Regarding “preserving” an RA. AFAIK, it can only be done to employer-linked Provident or Pension Funds in case when you RESIGN from employer. Not applicable to individually owned RA Funds. (…besides, a new Preservation Fund policy, will mean a new set of upfront commissions)

To wrap up: convert to the same company’s latest-generation RA Fund platform (there should be no comms involved, maybe just an admin-fee?) Secondly, check if (once converted) any change to 0% annual contribution increase will have any effect on penalties. (If you have faith in the new product, it won’t hurt by allowing annual premium inflation, if not, invest the diff elsewhere in a UT or ETF.)

Michael – you say that there are benefits for older people but they only kick in at age 65 plus, but there are very little benefits especially if you have a good pension and your RA was to enable you to live a lot better than just off your pension. So your pension and the RA/LA payments are treated as income by SARS so your tax rate is quite ridiculous given that when you are 70 plus who want to go and look for another income stream to augment your pension. Also the medical aid in the tax regime at the moment is poor and a large portion is not tax deductable

Hi Graham. Indeed, when one earns a (main) pension income, plus a (supplementary) RA annuity income, the additional earnings stream (same argument if you declare property rental income) the various income streams are thrown together in one pot & assessed by SARS. Thus, correct as you state, the RA (or rental) income will be lobbed on top of your marginal bracket. Having said that, the total tax-savings for contributing (BOTH to your RA & employer pension fund) would still be more through your working years, compared to the extra tax you eventually pay on supplementary retirement income. (Unless off course IF you earn higher income during retirement compared to your working life…which is extremely rare).

I did not discuss the following though: for the well-healed/wealthy under us, earning far in excess of the 45% marginal bracket (R1,5+mil p.a.), the tax-saving of RA fund is neutralised….as you save 45% on the premiums, and then pay tax at your 45% bracket when you retire, on top of other income. Just a tax-deferment exercise.

Medical formula (section 6B rebate) is extremely verbose/complex. Irrespective, once 65-age is reached, it accounts for all your medical expenses to be included into the rebate formula. The impression is created that a “large portion is not tax deductible” is misleading, as SARS practically refunds a % of your “excess/additional” medical expenses. (Heaven forbid if Govt decide scrap the Section 6A rebate linked to the premiums/number of members on the scheme.)

You can thus claim the figure reflected on your medical tax cert which were not covered/refunded by the scheme, plus valid medical expenses not claimed to the fund / i.e. where the fund does not know about your claims…like those cash co-payments for doctor’s consultations. (Bear in mind that not all medical expenses incurred at a pharmacy can be claimed…it must be ‘prescribed’ meds.)

🙂

I will try to answer this from a village persperctive/ from a men who has a homestead located on tribal trust land (tenure system). During my active years, i build my home in village, drilled my borehole for water supply, build/grew my head of livestock (cattles, sheep, goats, etc) and by the time i got to 65 years ie the pensionable age, i retired and relocated to my village. Freed up my house in the city for rental. Now im leaving off my pension, rental income and livestock sales. So to answer the question under discussion, YES you can retire on one RA but this is dependent on your health, lifestyle, family set up etc. Our cirmustances and situations as people differ thus our financial requirements.

I think you misunderstood the question, he might have say 4 different RAs. He wanted to know if he can retire from just 1 one the 4 because of his stated reasons.

Your post is indeed correct about preferably having a diversified portfolio of income.

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