Are Retirement Annuities Right For You?
Saving for your retirement means making choices.
Have you considered how you’re going to fund for the later years in your life?
One popular option is to use a retirement annuity to help you save.
So what exactly are retirement annuities?
How do they work?
What are the advantages of using such a retirement saving tool?
Are there disadvantages to using them?
And how should you go about picking a retirement annuity?
Let’s take a closer look at one of South Africa’s most popular retirement saving products…
What Is A Retirement Annuity?
A retirement annuity (RA) is an investment vehicle to save for retirement, which has tax benefits.
If you don’t have the option of paying into a pension or provident fund through your employer or are self-employed, RAs are definitely worth looking at.
Fund managers, such as Coronation, Old Mutual and Investec, are the primary providers of this type of retirement saving scheme.
Yet RAs aren’t just for those who don’t have a pension through their employer or the self-employed.
If you want to contribute more to your retirement savings, you can use a RA to help you do this in a tax-efficient way.
As with all things retirement related, the earlier you start contributing, the better. This gives your money more time to grow.
The Inner Workings of Retirement Annuities
When you contribute to a RA, what does the fund manager do with your money?
There are different types of RAs available, but broadly speaking, fund managers will invest your contributions with the aim of giving you inflation beating returns over the long-term.
Due to the legislation governing them, fund managers have restrictions on what they can invest in.
For instance, investments can’t be highly speculative.
Different fund managers may have varying features to their RAs.
Why Retirement Annuities Are For You
There are numerous benefits to saving for retirement using a RA…
Advantage # 1: Tax Benefits
This is one of the main reasons why many people opt for a RA to save for retirement.
The contributions you make are tax deductible.
This increases the amount of money you have working for your retirement.
But there are limits to the tax benefits.
It amounts to 27.5% of your taxable income, which has a limit of R350,000.
When you can, ensure you contribute the maximum to boost your retirement pot.
In the event you exceed the limits in one tax year, this excess amount will carry over into the next tax year.
Another tax benefit of using RAs is you don’t pay tax on the returns either.
This helps to grow your money faster.
Advantage # 2: Encourages You To Save
By contributing to a RA, you’re regularly putting cash towards your retirement.
One of the conditions of a RA is you can’t access the funds until you’re at least 55.
This saves you from the urge to dip into your savings.
Once the RA matures, the most you can take one-third as a lump sum.
The first R500,000 of this is tax free.
The remaining two-thirds must go towards an annuity or investment to provide you with an income during retirement.
Advantage # 3: Compounding
By regularly contributing to a RA, which can grow in value tax-free, you let compounding work its magic over the years.
Compounding means you start earnings interest on your returns, which then goes on to earn more interest.
This snowballs the growth of your investment exponentially over the years.
This is why the earlier you start saving for retirement, the better.
Advantage # 4: Creditors Can’t Get Their Hands On It
A RA doesn’t form part of your estate. So if you’re declared insolvent, the cash in your RA is safe.
And in the event you pass on, your RA will pass to your named beneficiary, such as your partner.
In this case, creditors can’t place a claim on the money, nor is there estate duty payable.
Advantage # 5: It’s A Diversified Way To Save For Retirement
The fund manager you have your RA with will invest in a number of different assets.
This gives you ample diversification, which lowers your overall investment risk.
For example, a RA may invest in:
- Shares (in both South Africa and offshore)
Advantage # 6: A Flexible Savings Product
You can increase your contributions into a RA over time.
And you can also add in lump sums.
This means you can take advantage of times when you have more money to put towards your savings.
For example, you may decide to put your annual bonus into your RA instead of spending it.
You may also find that you can skip contributions for a period of time.
For instance, if you lost your job, you could cease contributions until you find employment.
The Downsides of Retirement Annuities
Disadvantage # 1: You Can’t Touch Your RA Until You Turn 55
Whilst this also features as one of the advantages of a RA, in times of financial strife or an emergency, you can’t access any of the money you’ve put into a RA.
Whilst this is a disadvantage, it ensures you don’t interfere with your savings in a RA.
For most, this benefit far outweighs the disadvantage as you know you have money put aside for your retirement.
Disadvantage # 2: Costs And Fees
As with all financial products, there are costs and fees to consider.
As the industry matures and with increased competition, fees and costs are coming down.
You need to weigh up the impact of the different cost and fee structures across different offerings to ensure you’re getting the best deal you can.
How To Find The Best Retirement Annuity For You
With such a vast number of RAs out there, the best thing to do is seek professional advice to help you pick the right one.
Consult a financial planner or advisor to help guide you through the options. He or she will also ensure you’re contributing enough to give you the savings pot you need when you retire.
Saving for retirement is by far the most important financial decision you’ll have to make.
It’s well worth paying for advice to ensure you opt for a product that is right for you and to make the most of the tax benefits of this product.
Until then, here’s to a comfortable retirement.
The Money Lab