Understanding Retirement Annuity Funds

Not sure if you should be investing in a retirement annuity? Looking for an extra tax-efficient savings vehicle? Not formally employed? If either of these sound familiar to you, best read on. 

You and I will delve into the details of retirement annuities and ensure you understand retirement annuity funds. These can be a little bit complicated, but we will make them as simple as possible. Let's dive in.

What is a retirement annuity fund

Retirement annuities are government incentivised tax-efficient funds to save for retirement. What? English, please. The government wants us to save for retirement, as there is an increasing problem of the government needing to assist old age people with social and old age grants. 

So, they give us our tax back on our contributions to incentivise us to save as much as possible in these structures. Not only do they give us our tax back on contributions, but we also don't pay tax on any of the growth within the fund either. 

This is an amazing tax-efficient savings structure for retirement. For all these benefits, the government expects us to stay in these retirement annuities for a long time. We can't access our money and must invest within certain limits. The last downside is that we can't take out loans against our retirement annuities.   

Let's take a look at how retirement annuities work.

How does a retirement annuity work? 

No employer relationship: Unlike pension and provident funds that are tied to an employment relationship (i.e. you need to work at the company), retirement annuities don't have an employer/employee relationship. This means you can use retirement annuities to supplement your pension funding, and you can also choose your funds, within limits. Entrepreneurs can use a retirement annuity fund to fund their pension funds as they would have no other tax-efficient retirement savings vehicle.

Annual limit: You can invest up to 27.5% of your taxable income (salary plus other sources of income) into a retirement annuity, up to a maximum of R350 000 per year. This means you get your tax back on these contributions made to your retirement annuity. 

Changes to my retirement annuity: You can set up your investment monthly, quarterly, or annually according to your needs. Your investment can be stopped, increased, or decreased with no admin or penalties being charged. Some life-investment houses might charge a penalty for stopping your investments earlier. Always best to ask before you make any changes. 

Protection: Retirement annuities are protected from all creditors except SARS and maintenance claims. Depending on your marital regime, your retirement annuity can form part of a divorce settlement. 

No tax: Not only do you get your tax back on contributions, but all dividends, interest, and capital gains made on growth are tax-free. 

This is epic, right? Surely there must be a downside? The only downside to retirement annuities are listed below:

Retirement annuity withdrawal: A popular question from people needing cash is when can I withdraw from my retirement annuity? You can't make any withdrawals from retirement annuities until the age of 55, with an exception for ill health and emigration. This needs to be kept in consideration. You need to be aware that these savings are for the long term and can't be withdrawn until the age of 55. At age 55 and you want to withdraw, if the amount (adding up all your retirement annuities) is less than R75 000, you can take the full amount in cash. 

Access at retirement: At the retirement age of 55 and onward, you can take ⅓ of your retirement annuity in cash, and ⅔ must buy an annuity to provide you with income during retirement. This income will be taxed according to your tax rate.  

Regulation 28: Regulation 28 (summary is in the link) is legislation for retirement money in South Africa, Regulation 28 limits the exposure to certain asset classes within your retirement annuity portfolio. They say it's to protect the investor from poorly diversified portfolios. The average returns of the multi-asset high equity sector (most aggressive regulation 28 compliant funds) over 5,10 and 15 ending 31 December 2022 is 6.04%, 7.69%, and 8.02%. 

No Leverage: If you read some of my previous articles, you should know that I'm a firm believer in using leverage to buy income-generating assets. No loans can be made from your retirement annuity and it cant be used as collateral. This means you might not be able to capitalise on a good opportunity when it arises as all your cash flow and assets would be within the retirement annuity.

Where can I invest in a retirement annuity?

All long-term insurance, and unit trust managers provide these accounts. I found the easiest way to use EasyEquities. Click here to open your account with EasyEquities and receive a FREE R50 to start your investment journey. 

Ensure you look for a cheap retirement annuity based on its admin fees. Then you can choose the funds to invest in. Funds that I would suggest using on EasyEquities platform, or any platform (this is not advice, just suggestions):

Satrix Balanced Fund, Sygnia Skeleton 70, Allan Gray Balanced, Ninety-One Managed 

Summary

Taking advantage of retirement annuities can be beneficial but it's not a one size fits all solution. For the more entrepreneurial investors, other options might far outweigh the benefits of a retirement annuity. Before opening your retirement annuity, weigh up all the pros and the cons of a retirement annuity and ensure it's the right investment for you. If you are unsure, reach out on Twitter or send an email to info@finsesh.com

If you want to find out more about becoming financially independent, please see our free course. If you want a blueprint toward financial independence, you can enroll in our Stages to financial independence course.

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