With the myriad of investment vehicles available to the investor, it can be a real challenge to choose one that is right for you. When our Grand Parents were growing up there were relatively few choices; a fixed deposit bank account, a company pension plan, endowments and the stock market was just about all that was available.
Now we have Government Retail Bonds, Exchange traded funds, hundreds of Unit Trusts, SATRIX, and a host of other savings and investment vehicles.
One of the more popular investment vehicles is a Retirement Annuity, even though many people have them in their investment portfolios there is a lot of confusion as to what they are. Retirement Annuities were first introduced as savings vehicles in South African in 1960 when an amendment to the Income Tax Act 58 of 1962 allowed taxpayers the right to pay contributions into an approved retirement annuity fund up to a maximum of R600 per annum, tax deferred. The amount allowable has steadily increased every few years to its current rate of 15% of taxable income.
The introduction of retirement annuity funds had a far-reaching effect, especially for self-employed individuals. It gave them the opportunity to take out individual pension plans and obtain tax relief on their contributions. Previously only employees who were members of a group pension scheme enjoyed the benefits of tax deferment.
Today a retirement annuity can form an important part of an individual’s retirement strategy. So how does it compare to a standard provident or a Pension plan?
The main difference is that RA’s are paid for by individuals who are either self-employed or who work for a company that has no retirement scheme. In other words, they are individual tax deferred savings plans.
*Smith says “While an RA is an effective retirement vehicle its value can be affected by market volatility and the performance of the fund that it is invested in. You should view an RA as part of your overall investment strategy but not as your only means of savings. If you start an RA relatively early in your life, say at the age of 25, and keep investing 15% of your salary until you hit 55, it may be all you need in retirement. However the performance will need to be monitored closely and adjustments made when the funds do not perform adequately. Your financial advisor can help you through that process and keep you up to date with the annual performance of the fund”.
Retirement Annuities have come under fire in the past for losing value when the markets are volatile, however the chance of you losing all your money in an RA is extremely remote. This is because you will be investing in vehicles that are very large. For instance, if your RA is one of the Unit Trust linked variety your monthly investments will be going into professionally managed funds with hundreds of millions of Rands under management.
It is important to note that an RA is a commitment in every sense of the word, once invested you cannot access the money until you reach the age of 55. You will then be entitle to withdraw one third and the rest must stay invested which you can draw a monthly annuity from. When you retire the first 300,000 rand is tax-free. The remaining funds are invested in an annuity to provide you with income during your retirement. In the event of your death, your retirement annuity can provide a source of income for your dependents.
Pension funds often require a contribution that is a fixed percentage of your salary, RAs, however are more flexible and allow you to slowly increase your savings as your earnings increase. You can also invest lump sums into your RA.
Smith says “So, if you’re self-employed or work for a company that has no group pension, RA’s should play a role in your investment strategy. At the moment it is the only tax deferred investment vehicle available to a person earning a salary”