From the day you start earning an income, ensuring you will be in a good financial position when you decide to retire one day should be a financial planning priority, experts advise.
There are several vehicles in which you can invest your retirement savings.
Pensions, provident funds, retirement annuities
Many people will have a pension or provident fund among the employee benefits offered by their employer.
For individuals or the self-employed, or those who do not have a pension or provident fund via an employer, a retirement annuity (RA) is a tax-effective retirement investment vehicle.
In fact, many people who have pension or provident funds supplement their retirement savings with an additional RA to ensure they have enough for retirement.
How is an RA different?
"An RA is a voluntary pension plan that an individual can belong to if the person complies with the minimum requirements, which normally constitutes a signed agreement to implement the RA, acceptance of the agreement by the service provider and payment of contributions either on a recurring or once off basis," explains Johan Botha from Aon South Africa's employee benefits division.
"RAs are normally offered by large financial institutions such as life assurance companies and certain investment companies, and the funds within an RA are locked in until the member reaches the age of 55."
An RA differs from other retirement products in that an employer or employee relationship is not required, as is the case with pension funds and provident funds.
"The purpose of a retirement annuity is to provide a monthly income once you reach retirement age. You have the option of taking one third of the benefit amount in cash with the remainder of the funds being reinvested to provide a monthly pay-out or annuity. Or you can reinvest the full benefit amount from which to draw a monthly income," says Botha.
What happens when you die?
While still alive, the RA member will be the sole beneficiary of its benefits.
However, if you were to pass away before accessing your RA benefits, then the total fund value becomes payable as a death benefit, of which, under current legislation, the first R500 000 is tax-free with the balance of the funds taxed according to a sliding scale.
If you are already drawing a monthly sum, the availability of any value to be paid to beneficiaries will exclusively be dependent on the type of annuity or pension that was purchased.
What about your dependents?
"According to the Income Tax Act, an RA is excluded from a person’s estate at the death of the member, which is why the nomination of a beneficiary on your retirement annuity is vital," says Botha.
"It is very important to consider who you support financially and who relies on you for their livelihood and daily living costs when you complete your RA nomination form."
The trustees of a retirement annuity fund will determine how to make an equitable allocation of the money that is available. They would also consider other allocations such as the terms of a will or other assurance.
Minor children could receive more than major children. Some dependants might be excluded due to the greater need of others based on the amount that is available for distribution, for example. There are numerous important aspects to consider when children, especially minor children, are involved.
"Children normally receive their allocations in cash when they reach the age of 18, unless otherwise specified by the beneficiary.
"If a minor child is allocated a benefit from an RA, the biological parent (if still alive) will receive the benefit on behalf of the minor unless the parent is found to be unfit to manage the money on behalf of the minor or where the parent instructs that the money be invested in a vehicle such as a trust or beneficiary fund," says Botha. "If any other party is involved other than the parent, the money will normally be invested in a beneficiary fund and the legal guardian will receive an allowance."