By: Hannah Myburgh
From tax advantages and disciplined savings to investment growth potential, retirement annuities can be effective for housing one’s retirement funds. There are, however, complexities to be navigated when investing through a retirement annuity. Here are 8 things to know about retirement annuities:
You can transfer your insurance RA to a unit trust platform
If you have a traditional, insurance-based retirement annuity in place, you can transfer your policy to a unit trust platform, although it is advisable to understand if your insurer will charge any cancellation fees for doing so. If you’re contemplating such a move, your financial advisor should request costs from your current insurer and prepare a cost-benefit analysis for you so that you can make an informed decision.
You can use an RA to preserve your retirement benefits
Transferring your group retirement benefits into an RA structure has significant advantages that should be weighed up against the unique features of a preservation fund. If you transfer your funds into a retirement annuity, you may continue contributing towards the investment on a regular or ad hoc basis, whereas, in the case of a preservation fund, no additional contributions can be made. That said, whereas a preservation fund permits one full or partial withdrawal before the age of 55, you will not be able to access the funds in your RA before the age of 55.
You can invest in as many RAs as you like
You can open as many retirement annuities as you like, although you need to be clear on reasons for doing so. Remember, you are permitted to invest up to 27.5% of your taxable income on a tax-deductible basis towards an RA, with this limit being applicable to the aggregate of all your contributions towards an approved retirement fund.
RAs are more tax-efficient than TFSAs
Retirement annuities and tax-free savings accounts present the same tax efficiency for investors in that no tax is payable on any dividends or interest earned in either an RA or a TFSA, and there are no capital gains tax consequences. The major difference between the two investment structures is that your contributions towards a retirement annuity are tax-deductible up to 27.5% of taxable income, whereas your contributions towards a tax-free savings account are made with after-tax money.
The funds in your RA are protected from creditors
Section 37B of the Pension Funds Act provides that the funds in your retirement annuity are protected from your creditors in the event of insolvency, although this does not mean that your retirement annuity funds enjoy complete protection from creditors. In terms of the Act, certain monies can be deducted from your pension fund money, including money owed to Sars, and amounts due and payable under the Divorce Act and Maintenance Act.
Your over-contributions will roll over
Any over-contributions made towards your retirement annuity will be rolled over to the following year where they can be used for tax deduction purposes in that year. The advantage of this is that the over-contributions will still enjoy investment growth, even though the tax benefit will only be gained in the following year.
The funds in your RA are not subject to estate duty
Funds invested in an approved retirement fund do not fall within your deceased estate and the value thereof is not taken into account when calculating estate duty. As such, retirement annuities can be used effectively to reduce estate taxes.
You can stop contributing to your RA without being charged penalties
A notable feature of Linked Investment Service Provider (LISP)-based retirement annuities is that they are transparent, flexible investments that, unlike insurance-based RAs, allow investors to completely customise their contributions.
* Myburgh is a financial planner at Crue Invest.
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