Thandi Ngwane, Head of Strategic Markets, Allan Gray
To retire comfortably, you have to save up a substantial sum of money, which will have to last you up to 35 years past the day you retire. Starting a retirement annuity (RA) fund investment is a good way to do this. And, even if you belong to a pension or provident fund through the company you work for, you can boost these savings by using an RA too. An RA is like a portable retirement fund that goes where you go. It is not tied to your employer and is completely funded by you.
RAs offer a number of advantages, the biggest of which is their tax-efficiency. The government encourages us to save for retirement by offering tax incentives if we invest in a registered retirement fund. If you don’t contribute to a pension fund, you can invest 15% of your taxable income into an RA tax-free. If you do currently contribute to a pension fund, you can contribute 15% of any income that is not taken into account when calculating your pension contribution tax-free.
Another benefit is that you are not allowed any withdrawals until you retire (anytime from the age of 55), so your money is kept for its intended purpose. Your investment is also protected from creditors.
Conventional RAs had a number of drawbacks, but new-generation RAs that give you access to unit trusts as the underlying investment are one of the best savings vehicles for retirement. They come with low product fees, no penalties for surrender or discontinuation and fully transparent, negotiated adviser fees. Furthermore, you can choose the underlying unit trusts you want to invest in and switch between funds at no extra cost. However, you will need to ensure that your RA complies with retirement fund regulations, which stipulate certain limits for assets, particularly equities, for retirement savings products.
What happens when you retire?
At retirement, a minimum of two-thirds of the capital in your RA must be invested in a pension-providing vehicle such as a living annuity or guaranteed life annuity. This ‘transfer’ is tax free. Your annuity income is taxed at your marginal rate, which may be lower than your tax rate prior to retirement.
February is an important month
February is an important month as it is the last opportunity to make use of the tax incentives (discussed above) before the tax year ends. So if you are considering starting an RA investment, or making an additional contribution to your existing RA, you may wish to consider doing so before the end of the month to take advantage of the tax concessions.
Remember, the earlier you start, the less you’ll have to save on a monthly basis to reach your goal. If you can only afford to set aside a small amount, you may need to consider retiring later. You can learn about retirement annuities in more detail by visiting www.allangray.co.za/investingexplained/ Do you have any investment-related topics? Send an email to email@example.com and we’ll do our best to deal with popular themes in this column.
Allan Gray Proprietary Limited is an authorised financial services provider.