Can I invest in another RA at 60?

Two advisors answer this reader's question.

I have reached retirement age (60 years) but intend to work until 65. I have two retirement annuities (RAs) which I will use to supplement my retirement income after 65. Could I invest in another RA at 60?

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Dear reader,

Optimising your annual tax benefits is definitely one of the best financial decisions you can make in your portfolio.

As long as you are earning an income, you are allowed an income tax deduction with regards to your total retirement fund contributions per tax year. While no maximum age applies for an individual to be a member of a retirement annuity (RA) fund, always check the rules of the particular retirement fund for confirmation. You are also allowed to retire from this retirement vehicle on becoming permanently incapable of carrying on your occupation due to sickness or injury (or, for the benefit of other readers, on reaching the age of 55).

Your income tax deduction on your total retirement fund contributions is limited to the lesser of R350 000 per tax year or the greater of 27.5% of your annual taxable income or remuneration.

This is a great way to minimise your overall income tax payable to the South African Revenue Service (Sars).

There is also an additional benefit you can obtain should you wish to save more than the annual R350 000 p.a. This is referred to as a Section 10C exemption.

Normally at retirement, and if the fund value exceeds R247 500, you are allowed to access up to one-third of your retirement benefit in a RA, preservation fund, pension or provident fund, subject to tax. The first R500 000, across all your retirement products, is taxed at 0% (i.e. you can consider it tax-free) provided you did not receive a retirement benefit (including a severance benefit) before.

Any amount saved towards your RA over and above R350 000 per annum (or 27.5% of the greater of your remuneration or taxable income) is seen as an excess contribution and will accumulate. Once you retire from this product, you can benefit from these accumulated funds. Your R500 000 “tax-free” cash lump sum can be more – for example R800 000 or even more – depending on how big your accumulated excess contributions are. This way, you are increasing your tax-free lump sum.

The minister of finance recently announced some good news in his national budget speech.

Until recently, retirement funds were only allowed to invest up to 30% of their assets in offshore markets with an additional 10% permitted to invest in Africa. Following the recent change, retirement funds may now in total invest up to 45% in offshore markets. This also allows for further diversification opportunities in the near future.

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Dear investor,

The simple answer is yes.

Administrators such as Ninety One, Wealth Foundry, Momentum and so on allow investors to start retirement annuity investments at any age. Retirement from these products can only be done from age 55 as per our current rules.

For many investors, retirement annuities weren’t always an attractive investment option due to the restrictions imposed on global allocations within these investments. These restrictions, known as Regulation 28, have been amended with the recent budget speech.

Read: Pension funds may now invest up to 45% of their capital offshore

The new offshore allocation within these pre-retirement investments (retirement annuities, pension funds, provident funds, provident preservation and preservation funds) has been increased from 30% offshore and 10% African exposure to a total inclusive total of 45% offshore allocation.

Based on the long-term trajectory, having greater offshore equity exposure has been more beneficial for South African investors – as can be seen in the below graph.

Source: Brenthurst Wealth Management

With the now increased offshore allowance within these pre-retirement investments, they become a more attractive investment option.

Benefits of investing in retirement annuities

Growth in your investment is not subject to tax. What does this mean? You do not pay capital gains tax on any growth in the investment. You only pay tax when you ultimately receive your benefits in the form of an income, or retire and receive a lump sum amount greater than your tax-free portion (R500 000 or what is available thereof). With a retirement annuity, you can invest tax-free contributions up to 27.5%, of your annual income, capped at R350 000 per annum.

Beneficiaries can be nominated on your investment, meaning that your estate duty liability is reduced upon death. These investment proceeds will be transferred to the nominated beneficiaries and they will have the choice of either taking the cash lump sums (subject to tax) or investing them in a retirement annuity of their own choice.

Creditor protection is applicable for the investment. Recent studies show that a lot of South Africans are using up to 70% of their monthly income to service their credit responsibilities. Retirement annuities cannot be claimed by creditors to service bad debt, but the income derived from these investments can be. This is not something we would like to think about, but it’s a harsh reality in the current environment.

Emigration restrictions

It does need to be mentioned that for younger investors retirement annuities are becoming a less attractive investment vehicle due to restrictions for accessing your money if you want to emigrate.

South African financial emigration laws have changed in the last couple of years. If you now want to access your retirement annuity you must have been a non-resident for South African tax purposes for a period of at least three years.

There are also other alternatives for you. Given your age, it also might be beneficial to you to invest in a tax-free savings account if you aren’t already utilising your full annual amount of R36 000. Combining this with a retirement annuity is tax-efficient, and both are good savings vehicles.

As with all investment decisions it is best to speak to a qualified and registered financial advisor.

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