As the tax year-end approaches, many investors are topping up their retirement annuities to maximise tax deductions. With numerous options available, navigating the complexities of retirement annuities can feel overwhelming. This article simplifies the process, providing a comprehensive A-to-Z guide to help you make informed decisions about your retirement savings.
Access: There are very few barriers to entry when it comes to accessing retirement annuities. Most LISP platforms have a minimum premium requirement of R1000 per month. There are a large number of reputable LISP platforms that offer retirement annuities meaning that South Africans are spoilt for choice when it comes to selecting an appropriate RA.
Ad hoc contributions: Investors are permitted to make ad hoc contributions into their retirement annuities at any time, making them attractive retirement funding options for those who are self-employed or earn commission/incentives.
Beneficiaries: Although you will be required to nominate beneficiaries to your retirement annuity, keep in mind that the distribution of your benefits in the event of death is governed by Section 37C of the Pension Funds Act. The fund’s trustees are required to identify all those who are financially dependent on you in any way and to distribute the proceeds to them accordingly.
Contributions: You are free to structure your retirement annuity contributions in whatever manner you choose. From a frequency perspective, you can choose to invest on a monthly, quarterly, bi-annual, annual or ad hoc basis. Further, you are able to increase, decrease or stop your premiums at any time without fear of penalty or extra costs being charged.
Creditors: Generally speaking, any funds held in a retirement annuity enjoy protection from your creditors. However, this does not apply to tax owed to SARS or money owed in respect of a maintenance claim.
Disability: If you become ill or disabled before the age of 55, you may qualify for early retirement from your RA provided you meet the stringent requirements in respect of permanent disability.
Emigration: If you choose to break your tax residency from South Africa and emigrate, you are permitted to withdraw the full amount from your retirement annuity if, after three years, you are no longer a South African tax resident according to the definition in the Income Tax Act and you have maintained your status as a non-tax resident for a minimum of 3 years in a row.
Estate duty: The funds in your retirement annuity do not form part of your deceased estate and therefore do not attract estate duty. Once the fund trustees have identified your financial dependants, the funds will be distributed directly to them. From a financial planning perspective, keep in mind that this process can take up to 12 months so be sure that your loved ones have access to other funds immediately after your passing.
Fees: You should be aware of the fees applicable to your retirement annuity which include the asset manager fee, administration platform fee and the financial planner fee. High investment fees will eat away at your returns over time, so it is important to ensure that you have full fee transparency when signing up.
Fund manager: Your fund manager is responsible for choosing from a selection of local and international shares which can be included in your retirement investment and actively managed. This is a highly specialised area as the fund manager needs to select the underlying funds that he/she will best achieve the strategy’s investment mandate over the long term.
Legislation: Retirement annuities are compulsory retirement funds and are governed by the auspices of the Pension Funds Act, in conjunction with the Income Tax Act. Whereas pension and provident funds are occupational funds accessible as a consequence of your employment, retirement annuities are individual retirement funds.
LISP: A Linked Investment Service Provider is an independent administration company that offers investors access to collective investment schemes across a number of different management companies. LISP platforms can therefore include retirement annuities, unit trusts, endowments and living annuities.
Multi-manager: A multi-manager researches and analyses the funds offered by various asset managers and builds a portfolio from these funds in line with a specific investment objective. The multi-manager will invest in specialist portfolios managed by carefully selected managers, following specific or general investment mandates. Due to economies of scale, many multi-managers are able to offer competitive investment fees.
Penalties: Unlike insurance retirement annuities, there are no penalties or cancellation fees when it comes to unit trust retirement annuities. You are free to stop and start your investment premiums as you like without being penalised. If you have an insurance—based RA in place and wish to move it to a unit trust-based RA, ask your financial advisor to establish what cancellation fees, if any, will be incurred.
Regulation 28: Regulation 28 of the Pension Funds Act limits the exposure within the RA structure in relation to equities and property. In terms of this regulation, exposure to foreign assets is limited to 45%, 75% in equities (both local and foreign), 25% in property, 15% exposure in private equity, 10% in commodities, 10% in hedge funds, and other excluded assets of 2.5%. Further, retirement funds may not invest more than 25% across all asset classes in one particular entity or company.
Reporting: You should receive quarterly investment statements from your provider which sets out all the details of your investment, its performance, returns, contributions and fees, together with investment commentary from the asset management team. Reporting should be easy to understand, transparent, timeous and accurate.
Retirement: The earliest one is permitted to retire from an RA is age 55, and there is no maximum age at which you need to retire. At retirement, you have the option of withdrawing one-third of the funds in your RA, with the first R550 000 being exempt from tax. The balance of your one-third withdrawal will be taxed as per the retirement tax tables. The remaining two-thirds in your Retirement Component must be used to purchase an annuity income in the form of a life or living annuity.
Savings component: For investors who were members of a retirement fund before 30 August 2024, the Savings Component of your retirement fund would have been set up using a maximum of 10% of your retirement savings capped at R30 000. From 1 September 2024 onwards, one-third of an investor’s retirement savings will be allocated to the Savings Component, while two-thirds will go to your Retirement Component. Going forward, members will be able to access their Savings Components once in a tax year with a minimum withdrawal amount of R2 000, keeping in mind that withdrawals will be taxed at their marginal income tax rate. At retirement, members will be able to withdraw the full balance in their Savings Component plus the portion of the Vested Component that may be taken in cash.
Tax: RAs qualify for the same tax incentives as pension and provident funds. This means that you may deduct your contributions to a retirement annuity up to 27.5% of taxable income for tax, 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, and no capital gains tax is paid on investment growth. At the end of the tax year, you can include your RA contributions on your tax return forms and receive a rebate from SARS. SARS has made it a priority to incentivise South Africans to make adequate provision for their retirement which is why retirement annuities now offer individuals a number of significant tax breaks.
Taxable income: You are permitted to invest up to 27.5% of your taxable income towards an RA on a tax-deductible basis. Over and above your salary, keep in mind that any rental income should be included in the calculation. Further, dividends earned from Real Estate Investment Trusts (REITS) are subject to income tax in your hands and can therefore be included. Gains derived from the realising of capital assets, such as property or discretionary unit trusts, may result in a capital gain. The first R40 000 of capital gain is excluded, and thereafter 40% of the gain is added to taxable income. All interest earned in a tax year is subject to income tax. Currently, the first R23 800 per year in respect of those under age 65 and R34 500 for those older than 65 is exempt. All interest earned thereafter is added to one’s taxable income.
Transfer: You are free to transfer your unit trust RA to another platform at any stage. This process is governed by Section 14 of the Pension Funds Act and generally takes around 8 weeks to complete. There are no tax implications for transferring your RA from one provider to another, and there are no costs involved. However, as mentioned above, if you plan to transfer an insurance-based RA to a unit trust platform, be sure to establish the costs involved.
Withdrawal: When you retire formally from your RA, you are permitted to withdraw the full amount of your Savings Component plus the portion of the Vested Component that you are permitted to take in cash, subject to the retirement tax tables.
Vested Component: This component will house all contributions made up until 30 August 2024, plus fund returns and any other credit amounts. This means that individuals who were not part of a retirement fund before this date will not have a Vested Component. Provident fund members aged 55 or older as at 1 March 2021 can either stay and continue contributing to their current provident fund or move to the new Two-Pot System. The funds held in the Vested Component can be accessed on resignation, retrenchment, or upon retirement, with pre-retirement withdrawals being subject to withdrawal tax.
Have a beautiful day.
Sue
