Retirement planning is a topic that often only seems to concern people when they are on the brink of retirement, when in actual fact retirement planning should be on top of your priority list from the day that you start earning your first pay cheque.
South Africans in general aren’t making enough provision for retirement and with improved healthcare comes longer life expectancies, which means that retirees now end up requiring more capital to provide them with an income for a longer period of time.
Retirement Annuities are savings vehicles that offer investors a flexible, tax-efficient way to save for retirement.
In terms of contributions, investors can choose to make use of once-off lump sums, monthly contributions or a combination of these two options. Retirement Annuities can be accessed at age 55, except in the following events:
- Permanent disability
- Fund value being less than R7000
At retirement age the investor can withdraw up to ⅓ of his or her retirement fund value as a cash lump sum (optional), while the remaining ⅔ is payable in the form of an annuity (monthly income).
The initial ⅓ cash lump sum is taxed according to the retirement tables, whereas the monthly income from the annuity is taxable in terms of the income tax rates for individuals. As legislation currently stands the first R315 000 withdrawn from the ⅓ cash value of the fund at retirement is tax free.
Who should consider using a Retirement Annuity?
- Individuals looking to save towards retirement
- Self-employed individuals
- Employees working for businesses that do not provide Pension or Provident funds
- Individuals whose employment has been terminated and are looking to house the proceeds of their Pension or Provident funds
- Members of Pension funds that are looking to save more towards their retirement
- Individuals that earn a significant amount of *non-pensionable income
* Non-pensionable income is your taxable income excluding your pensionable income, retirement fund lump sum benefits, assessed losses and capital gains. Pensionable income refers to income which is taken into account to determine contributions to a Pension or Provident fund.
Tax deductibility of Retirement Annuities
According to current legislation investors can qualify for a tax deduction limited to the greatest of the following:
- 15% of taxable income from non-pensionable income excluding severance benefits or
- R3500 less current contributions to a Pension fund or
Mr. Smith is a 25 year old male who earns R20 000 as a company employee and does not belong to a Pension or Provident Fund.
To determine Mr. Smith’s tax deductible amount the greatest of the tax deductible amounts must be calculated as follows:
- R240 000 per annum income x 15% = R36 000 per annum towards his Retirement Annuity or R3000 per month,
- R3500 per annum or R292 per month,
- R1750 per annum or R145 per month
Since R3000 per month is the greatest amount and Mr. Smith does not belong to a Pension fund he can contribute up to R3000 per month or R36 000 per annum to his Retirement Annuity and enjoy the tax deduction.
This tax deductible amount is then deducted from Mr. Smith’s taxable non-retirement funding income when determining his tax payable. His tax liability will then be lower due to the fact that his tax is calculated on a reduced figure. It’s important to note that his tax deductible Retirement Annuity contributions aren’t deducted directly from his tax payable.
Implications of this Tax deduction
For the calculations below the primary rebate has been taken into account and it’s assumed that the client does not qualify for any other tax deductions.
Based on the 2012/2013 tax year, Mr. Smith would pay a total amount of R37 360 in tax if he does not contribute towards a Retirement Annuity.
If, on the other hand, he makes the full contribution of R3000 per month or R36 000 per annum towards a Retirement Annuity Mr. Smith would only pay R28 360 in tax.
This means that by contributing towards a Retirement Annuity he would be saving R9000 (R37 360 –R28 360) in taxes for the year, whilst also saving towards his retirement.
Mr. Smith’s R36 000 Retirement Annuity (excluding interest earned) would therefore only cost him R27 000 (R36 000 – R9000) after taking the tax saving into account.
Other benefits of Retirement Annuities
- Pension, Provident and Preservation Funds can be transferred to Retirement Annuities, tax free.
- Retirement Annuities are protected against creditors and this in turn protects the investor in the event of insolvency.
- No Capital Gains Tax, Dividend Withholding Tax or any Income Tax on the capital gains, dividends or interest earned within the Retirement Annuity is paid by the investor.
- Retirement Annuities can be useful estate planning tools, as after death the benefits will be paid out to beneficiaries without attracting estate duty or executors’ fees.
Tips for successful retirement planning
- Start planning and investing towards your retirement as early as possible
- Educate yourself in terms of investments and the products available to you
- Consult with an accredited financial planner on a regular basis to review your retirement plan
In conclusion it is evident that Retirement Annuities are an integral part of any working individual’s financial planning due to the tax incentives and various other benefits that it has to offer.
For financial planning advice email Raul Jorge.
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Botha, M. et al., (2012).The South African Financial Planning Handbook 2012. Durban: LexisNexis. 871.
Helena Wasserman. (2010). Rethinking retirement annuities.http://www.fin24.com/Money/Investments/Rethinking-retirement-annuities-20100325 Last accessed 16th Aug 2012.
Stokes, G. (2012). Tax should be top of mind when structuring a retirement savings plan. http://www.fanews.co.za/article.asp?Life_Insurance~9,Retirement~1175,Tax_should_be_top_of_mind_when_structuring_a_retirement_savings_plan~12386Last accessed 20th Aug 2012.
Warren Ingram. (2010). Retirement annuities – any good? http://www.moneyweb.co.za/mw/content/en/moneyweb-money-matters? oid=493651&sn=2009+Detail Last accessed 16th Aug 2012.