By Cilma Heyns, Business Development Manager, Glacier by Sanlam

Retirement Annuities (RAs) offer more than just the opportunity to make additional provision for retirement; they also offer the potential for tax and estate duty savings. And the good news is that there is still time before the commencement of the new tax year to make additional payments into an RA in order to reap the benefits this year, or to begin investing in an RA if you haven’t already done so.

People are living longer and retiring earlier and therefore preserving and also growing capital well into retirement is a requirement in order to maintain your standard of living. Even if you are contributing the maximum amount allowed to your company pension fund, you will in all likelihood still experience a shortfall. To retire with 75% of your final salary you will need to make additional savings. If you do not need immediate access to your savings, i.e. you have an emergency fund in place, then an RA is an ideal vehicle. With an RA you will not be able to access the funds before age 55 and the funds may also be protected from creditors.

RAs offer transparency as well as a wide underlying fund choice. There are currently over 900 collective investment funds available to South African investors. More adventurous investors with a longer time horizon may even include a share portfolio as part of their underlying investment within the RA.

Younger investors who want to invest as aggressively as possible may view the Regulation 28 legislation as a hindrance. This stipulates that no more than 75% of the RA investment may be in equities and no more than 25% in funds with foreign exposure. Your equity exposure can be maximised by combining pure equity funds with property equity funds. This is an optimal way of structuring the underlying funds while allowing for maximum growth.

New generation RAs also permit investors to make ad hoc contributions, and even to stop or reduce premiums at any time, with no penalties.

RA investors can enjoy tax relief on their contributions of up to 15% of the non-retirement funding income. Non-retirement funding income is that portion of your income that is not taken into account when calculating your retirement fund contributions. Because retirement contributions are done before tax, investors can afford to invest more funds before tax than after. For example, if you have R1 000 a month available to invest after tax and a 30% marginal tax rate, you would be able to invest a larger amount (R1 428-57) in an RA before tax, than you’d be able to invest in a savings plan after tax – without altering your net salary. Investing a larger amount each month, coupled with compound interest over time, will see RA investors reap rewards in years to come. In addition, returns within the RA’s underlying funds are tax free.

On retirement, when the RA is transferred to an annuity (either guaranteed or investment-linked), tax will be paid on the lump sum portion taken as cash (based on a retirement sliding scale) as well as on the monthly income drawn, but not on the investment returns.

RAs can also provide opportunities for clever and efficient estate planning. All funds within the RA fall outside of the investor’s personal estate for estate duty purposes. The investor therefore does not pay estate duty (currently 20%) on the value of the RA. There is also a saving in executor’s fees.

Whether an RA is your primary retirement savings vehicle, or a supplement to your employer’s pension fund, it remains an excellent way to grow your money to ensure a successful retirement.