One of the more common questions I receive is whether or not a retirement annuity (RA) makes sense, especially for a self-employed person who is not a member of a company retirement fund.
The benefit is that your contribution to an RA is taxfree up to 15% of your income – assuming you do not contribute to a company pension or provident fund already. This amount will be raised to 27.5% on March 1. There is also no tax paid on dividends, interest or capital growth.
A big plus for business owners is that an RA is completely protected from creditors. It is the one asset your creditors cannot touch – not even the SA Revenue Service. This means that even if your business fails, your creditors cannot touch your retirement provision.
The drawback of an RA is that investment restrictions apply to ensure the savings are used for the intended retirement purpose: You can only have up to 75% invested in equities; You can only access your retirement annuity at retirement age (55 is the earliest you can select); and
You have to invest two-thirds into an annuity to provide you with an income in retirement, and this income is taxable.
In a unit trust or share portfolio, one would have full flexibility and, although you would not receive the tax benefit on the contributions or on the growth of the fund, in retirement you do not pay income tax on your withdrawals (although capital gains tax would apply). This investment would not be protected from creditors.
Research by Rowan Burger, managing executive: large corporate segment at Momentum, shows that over a 35year period, the tax benefit of contributing to an RA versus a discretionary investment for a high-income earner increases your income in retirement by a massive 67% – even taking income tax into account.
Lymp sym on retirement
30 40 50 65
R500 000 R814 447 R1 326 649 R2 758 008
RA Post-tax contridytion
R75 000 R122 167 R198 997 R413 710
RA Fyng valye year-eng
R78 624 R1 788 115 R7 179 395 R38 710 900