Five reasons to invest in a retirement annuity

Last updated on 5th December, 2018 at 02:44 pm

Investing in a retirement annuity (RA) is not only a popular way to supplement your retirement, but it can also offer valuable tax benefits. We look at five reasons why you should consider an RA.

Boosts your retirement savings

Few people save sufficiently through an employer retirement fund to allow them to retire comfortably. An RA can boost your other retirement savings to ensure that you’re able to maintain your standard of living in retirement. Remember, when you’re employed you use your salary to pay for medical scheme cover and other expenses. When you retire, you’re likely to continue to have to fund many of these expenses, but you won’t be earning the same income any more. An RA can help you to meet these expenses.

Uses the power of compound interest

If you save over a long period, your money earns interest. Compound interest is the interest that you will be earning on the interest that has been reinvested in your RA. So savings in an RA over, say, 20 years means that a large percentage of your ultimate savings will be the result of the growth that compounded on your savings.

RAs are meant to be long-term savings solutions, so they also enable you to smooth out fluctuations in the market and gain the long-term benefits of investment.

Offers tax benefits

If you take out an RA before the end of the tax year in February, you will enjoy reduced income tax as RAs are tax friendly. Your RA contributions are tax deductible up to a prescribed maximum of your taxable income every year. So if you pay a 41% marginal tax rate and invest R100 in an RA, R41 of that amount may effectively be paid back to you by SARS.

Not only can you deduct your contribution, but the investment return on the RA – this is the income and dividends on your investment – will not be taxed either.

Provides disciplined savings

You can only access your retirement annuity when you reach the age of 55. This prevents you from withdrawing money from your RA prematurely – a good means of forcing you into disciplined saving.

Protects investments

In addition, should you ever fall on hard times, your RA is protected from creditors. Furthermore, RAs offer you access to a variety of funds and asset classes and you can choose your underlying investments.