Top up your retirement savings

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

One of the real risks when planning for retirement is that we may outlive our retirement savings. How can we make the best of our retirement savings so that our golden years shine brightly? One option is a retirement annuity – let’s investigate.

Many employers offer their employees membership of a pension or a provident fund to which they contribute monthly to help them maintain their living standard when they retire. For self-employed people and employees in companies and organisations that do not provide a pension or provident fund, Retirement Annuities (RAs) offer an alternative method of saving for retirement. RAs were introduced in 1960, precisely to give self-employed people the same tax advantages when saving for retirement as people who belong to pension or provident funds. However, RAs are not restricted to self-employed people; they can also be used by employed people to top up their retirement savings. One of the risks when planning for retirement is that we may outlive our retirement savings. Human beings are living longer, and we have to provide an income that keeps up with inflation over an even longer time. RAs are a good way to maximise your retirement savings and to invest in a brighter future.

Benefits of an RA

•    You can deduct your contributions to an RA from your income for tax purposes. You can get tax relief on up to 15% of your non-pension funding income. For self-employed people this implies that they can get tax relief on up to 15% of their full income. For those formally employed who receive a 13th cheque or bonus which is not pensionable income, they can get up to 15% tax relief on this amount if they contribute to an RA. •    The growth on your investment is currently tax free, which means you don’t pay any tax, including capital gains tax, on the return on your investment. •    When you retire, you can take up to one-third of your accumulated savings in your RA as a welcome cash lump sum; the rest of the savings (which must be used to purchase an approved compulsory annuity) will pay you a pension for life. •    RAs typically offer a wide range of investment funds, much wider than that usually offered by pension or provident funds. Therefore even those formally employed could consider investing in an RA as they can get access to investment funds not available within their pension/provident fund. •    Some RAs offer risk benefits such as waiver of payment on disability, meaning that if you become disabled at any point, the life insurer will contribute on your behalf until your retirement date. •    Should you suffer any personal financial loss or go bankrupt, your retirement annuity savings are safe and protected from any creditors as they do not form part of your estate, giving you the peace of mind that these savings will be available when you retire and need it most. •    RAs are also flexible, so you can increase or decrease the amount you save. An RA can also house the proceeds of your pension or provident fund when your employment is terminated. It is advisable that RA contracts mature at 55, whether you retire at this age or not. This will give you the flexibility to decide whether it should mature or continue.

How much should I save?

You can save from as little as R250 to R500 a month. If you’re a parent or legal guardian, you can also apply to start saving in an RA on behalf of a minor. You can invest in as many RAs as you wish, but the tax benefit is determined in aggregate, not in respect of each individual RA. In other words, the tax relief on total contributions is limited to 15% of non-pensionable taxable income, irrespective of the number of RA memberships. And the tax-free lump-sum portion is not affected negatively if you contribute to more than one RA.

Can I access my RA?

In general, you can only access your RA at retirement, which may be from age 55 onwards. However, at that point, you can only take a maximum of one-third of the amount in cash. The balance must be used to buy an approved compulsory annuity. Should you be in ill health, you can access your RA earlier, and if you decide to emigrate you can withdraw your full RA investment in cash. By Wilma de Bruin