What should I consider when looking for a retirement annuity?

If this is your only investment you may want to explore splitting across other products to get product, liquidity and tax diversification.

I would like to save for retirement with a retirement annuity (RA) plan, but I do not know how to pick the correct one. Please advise on what to look out for when choosing which company to go with and the type of plan to choose.

Stephen Katzenellenbogen - NFB Private Wealth Management

Please note that the information provided below does not constitute financial advice; in fact, we are precluded from giving specific advice. Generic information has been applied given the context of your question. We have limited details about you and your circumstances – such detail may impact any advice provided.

One of the hardest parts of saving is the initial commitment; well done on taking the first step. It is unclear whether you are going to make a lump sum contribution or have a debit order. There is no right or wrong answer here but my feeling is that for this type of investment a debit order provides a good foundation and you can then make ad hoc top-ups too if you are able to (both practically and within legislative tax-deductible contribution allowances).

Here’s a retirement annuity 101 for any readers who are rusty on the basics:

  • Contributions are tax-deductible; in order to qualify for the deduction, you can contribute up to the lesser of:
    • R350 000 per annum; or
    • 27.5% of the greater of remuneration or taxable income; or
    • Taxable income excluding taxable capital gains.
  • Based on current legislation the growth within your RA is not subject to income tax, capital gains tax or dividend-withholding tax.
  • On death, the investment is not subject to estate duty. However, if the beneficiary chooses to take a lump sum this would be subject to the retirement lump sum tax tables.
  • Investment choice is guided by Regulation 28 of the Pension Funds Act. For most people, the two important take-outs are that foreign exposure is limited to 30% of the portfolio and equity exposure to 70%.
  • Minimum retirement age is 55 (no maximum) where you can access up to one-third of your capital and the balance must be used to purchase an annuity.

I can’t advise you on which product to go for because I don’t know enough about your financial situation, but a financial advisor can help you figure this out.

When it comes to choosing your platform though, you should look out for the following attributes:

  1. There should be no penalty for decreasing or stopping your contributions.
  2. You should have the flexibility to increase, decrease or stop your contributions whenever you like and as often as you like.
  3. The platform should offer a broad range of funds to choose from across asset classes and asset managers with no cost of switching.
  4. Pricing must be fair. This applies to the platform, funds and, if applicable, the financial advisor.
  5. Efficient administration (example: if you have a query after 10 years, you want it answered quickly and accurately).
  6. Easy access to help.
  7. Embrace technology so you can get your investment information when and how you want it.

Thankfully there are a couple of providers out there who match all these criteria.

In closing, I would like to wish you good luck. If this is your only investment you want to explore splitting across other products, such as a tax-free savings account, to get product, liquidity and tax diversification.

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Seek out Sygnia, they tick all 7 things in this list (for me at least). Very quick with answers (so far), and very helpful. Fees are also very good. I think the Skeleton Balanced 70 Fund is the cheapest RA to start with, in South Africa.

Check out Brendan on Twitter or his blog:
Twitter: https://twitter.com/your_money_blog
Blog: https://takechargeofyourmoney.blog/

Very nifty calculators on Walter’s site here:
Twitter: https://twitter.com/ratecompare
Site: https://www.mymoneytree.co.za/

Do you really buy an RA with the criteria you mentioned OR do you work for them? You have no long or medium term PERFORMANCE DATA.

I don’t work for them, I just don’t like paying money to someone for less than mediocre returns; squinting at Old Mutual here.

You are an adult, make your own decisions in life, this was just my 2 cents.

As someone who has witnessed the excesses of the retirement fund industry for 24 years. Get 3 different viewpoints and try and deal with investment companies. Those Old school RA’s were not what people thought. To quote a previous Moneyweb article, “Sadly the older RA’s provided by the 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.” Do your homework. Everyone says they have the best BUT 95% of working South Africans will not have enough at retirement to maintain their current standard of living. This seems to be in direct conflict in what they are telling you and selling you?

End of comments.



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