Investing through a retirement annuity

The past few decades have seen a rise in the popularity of new-generation retirement annuities which, being housed on LISP platforms, offer flexibility, transparency, and favourable investment costs.

Contributions Are Flexible

Retirement annuities are governed by the Pension Funds Act and are tax-efficient investment vehicles designed for individual investors and employees who wish to supplement their workplace retirement fund or invest for their retirement in their personal capacity. Investors have the flexibility to determine their own contribution plan (monthly, quarterly, annual, or ad hoc contributions being possible) making it ideal for those who earn irregular commissions, incentives, or bonuses. With invested funds being inaccessible before age 55, investors can avoid the temptation of dipping into their retirement nest egg prematurely.

RA OPTION FOR 1/3 CASH AND 2/3 FOR THE COMPULSORY ANNUITY

With a few exceptions, investors can only retire from a retirement annuity from age 55 onwards, although they are entitled to stop contributing towards their RA at any stage without fear of early termination penalties. There is no maximum age at which you need to stop contributing to your RA or by which you are required to access your funds. Once you decide to retire from your RA, you may withdraw up to one-third as a cash lump sum, while the remaining two-thirds must be used to purchase a compulsory annuity. On passing, your death benefit will be allocated by the trustees of the fund in terms of Section 37C of the Pension Funds Act which makes it their duty to distribute the funds equitably amongst your financial dependants.

Retirement Annuities Are Tax Efficient

As an RA investor, you may deduct your contributions to a retirement annuity up to 27.5% of taxable income for tax purposes, bearing in mind that the 27.5% limit applies to the aggregate of premiums to all the retirement funds that you contribute to, with the overall tax-deductible limit being R350 000 per year. Further, retirement annuities are exempt from tax on dividends and interest. The costs and fees in a unit trust-based RA are clearly broken down so that investors have full insight into how their money is being invested.

No Costs Or Penalties For Changes

Unit trust RAs are flexible by design in that they allow you to structure a portfolio from a selection of underlying unit trusts. You are free to amend your contributions as often as you wish, transfer your investment to another platform or stop contributing altogether – with no costs, penalties or transaction fees being charged.

Best Handled By A Discretionary Fund Manager

Most investment platforms in South Africa offer the solution for a portfolio manager to choose a selection of local and international shares which can be included in your retirement investment and actively managed. As portfolio management and the selection of the underlying unit trusts is a specialist field that requires expertise in investment capability, research and skill, this function can be outsourced to a discretionary fund manager who, because of economies of scale, very often offers competitive investment fees. Bear in mind, however, that any RA is subject to Regulation 28 of the Pension Funds Act which means that your investment will be subject to certain restrictions in terms of asset classes and risk exposure.

Good To Include Retirement Annuities In Your Investment Portfolio

With so many advantages, retirement annuities as long-term, tax-efficient investment vehicles are difficult to ignore and are worthy components of a carefully structured investment portfolio. 