A retirement annuity is an investment for your long term financial future. It is the vehicle which will provide an income for you once you retire. South Africans do not have a safety net to fall into. You are on your own despite the number of years you have paid your taxes to the economy. The COVID 19 pandemic has pushed those who don’t have ‘emergency funds’ to consider cashing in on their investments to survive the devastating financial impact on their lifestyles.
Your contributions reduce your tax
Regulations allow contributions towards a retirement annuity to be deducted up to 27,5% (including pension contributions) against your taxable earnings.
So, if you earn R100 000 you can deduct up to R27 500 of contributions toward retirement funds reducing your taxable earnings to R72 500. So there is a huge benefit(
if you can afford it),to contribute the maximum. Effectively, you get a refund at whatever your tax rate is. If you pay 40% tax you get back R40 from every R100.
Your returns improve
The returns received in your retirement annuity such as dividends, rental income and interest from bonds and cash are all exempt from tax. This significantly improves the compounding value of your retirement annuity into the future. If you invested in an endowment you will pay 30% to SARS
and if you invested in a unit trust or a money market fund you will pay back at your tax rate.
Options during the Lock Down
Your retirement annuity is only accessible at age 55 at which stage you can access one third of the value subject to tax. The remaining two thirds has to be invested in a pension, of which there are many options. The resulting income will be be subjected to tax. So, if you are considering your retirement as a form of relief be aware of the tax implications.
- If you are 55 plus you can draw your third and then invest in a living annuity. If the two thirds is below R125 000 you can then cash in subject to tax.
- If your retirement annuity is under R125 000 you can cash in subject to tax.
Retirement annuities come with restrictions which have tax advantages but are restrictive when it comes to accessing the cash.
My view is we should be allowed to access the full funds just as employees of pension and provident funds can when they leave their employers. Why not?