The advantages of investing in a retirement annuity | Fin24
 
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The advantages of investing in a retirement annuity

Feb 16 2018 15:10
Schalk Louw

This time of year, many investors are in a rush to contribute as much as possible towards their retirement annuities before the end of the financial year, and rightfully so. 

Along with the most obvious tax advantages associated with a retirement annuity (RA), investing in a retirement annuity also offers an array of other benefits:

Tax-efficient

With new legislation which became active on 1 March 2016, we saw an increase in the percentage of your allowable tax-deductible contribution (personal income tax) from 15% to 27.5% of your taxable income or remuneration, whichever is the greater, up to an annual limit of R350 000. 

This means that if you have an existing provident fund at your current employer to which you contribute 15%, you can now enjoy an additional 12.5 percentage points as an allowable tax deduction in an RA.

Furthermore, an RA is exempt from tax on dividends and interest, and you won’t have to pay capital gains tax on the growth earned on your investment. 

It teaches us discipline

Many may disagree that this is an actual advantage, but the fact remains that South Africans are simply not doing enough to ensure a comfortable retirement. 

Unless you are emigrating or qualify for early retirement due to ill health, you will not be able to touch the money in your RA prior to retirement. 

For those who are less disciplined and often succumb to the temptation of withdrawing from their investments to fund impulsive purchases, an RA is the ideal investment vehicle. But be sure to stick to what you can afford, always taking into consideration life’s little surprises. 

Don’t run the risk of investing too much and not having an emergency fund available when you really need it. 

You will have yourself to thank for a comfortable retirement

The reality many South Africans are facing is having to retire and survive on only the current government pension grant.

I have touched on this subject so many times before, but I will say it again: if you can live comfortably off a maximum grant of R1 600 (or R1 620 if you are older than 75 years) per month, you obviously have nothing to worry about and you don’t even have to read any further. 

But I doubt whether anyone will be able to live comfortably off so little money, and it is for exactly that reason that you need to save as much as you can towards retirement while you still have time. 

Cutting back on luxuries may not be much fun, but you will be extremely thankful if you are able to someday retire and still be able to, at the very least, maintain your current lifestyle. 

Your RA benefit is not subject to estate duty

In the unfortunate event of your death prior to retirement, your RA benefit will not be subject to estate duty. 

Always ensure that you list all your dependants and/or beneficiaries on your retirement investment application, or that you contact your adviser for the necessary requirements to have them listed, if you didn’t do so on your original application form. 

You can invest directly in shares in your RA

A Personal Share Portfolio (PSP) allows you to tailor your own bespoke share portfolio as part of your retirement investment strategy. 

Most RA platforms in South Africa now offer the solution for a portfolio manager to choose a selection of local and international shares, which, as a direct share portfolio, can be included in your retirement investment and be actively managed. 

Any RA is subject to Regulation 28 of the Pension Funds Act, which means that you will be subject to certain restrictions in terms of the weights you will be allowed to allocate to different asset classes (up to 75% may be invested directly in shares, both locally and offshore). 

Based on historical data, it is a well-known fact that shares held within an RA certainly offers the best long-term growth potential and for some it may come as a disappointment that they are not able to invest 100% directly in shares. 

On the flipside, however, Regulation 28 was implemented as a risk measure to benefit investors in both good and bad market environments. 

So Regulation 28 should offer you more investment protection in volatile markets. 

For those who already have an RA in place, make sure that you contribute as much as possible before the financial year-end to reap the tax rewards associated with it. 

For those who haven’t yet started saving towards your retirement, the best time to start is now. If you act quickly, you can still make a contribution before 28 February to qualify for the associated tax benefit later this year.

Schalk Louw is a portfolio manager at PSG Wealth.

This article originally appeared in the 15 February edition of finweek. Buy and download the magazine here.

retirement  |  saving  |  retirement annuities
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