Retirement annuity on steroids
Saturday, 28 February, doesn’t only mark an important date for companies whose financial year-end comes to a close, but it also marks an important date for personal taxpayers. Before I lose readers due to the fact that they despise having to pay anything that arrives in an envelope with a window, I would like to focus more on the actual benefits most taxpayers seem to overlook.
The Matryoshka doll, better known as the Russian nesting doll, reminds me of certain investment products. The concept is based on a ‘ doll’ (or in this case, investment product) within another ‘ doll’, which in turn, nests within yet another ‘ doll’, only to find out that the costs involved in each of these ‘nested’ products makes the end result look so unattractive, that the whole product range gains a bad reputation.
Retirement annuities (RAs) are a typical example of this and although investors tread lightly when it comes to this ‘ doll’, it actually holds some very attractive ‘nesting benefits’ in terms of tax:
1Contributions made within a specific year of assessment are deductible in that year up to a specified maximum, so Sars is in fact ‘sponsoring’ your RA contributions.
2If the value of your annuities exceeds R75 000 by the time you retire, you are entitled to convert a maximum of one-third of the value into cash. This lump sum is taxable at the following rates:
3If you resign and you are granted a withdrawal benefit on your pension or provident fund, you can transfer your retirement benefit to an RA completely tax-free.
4Most individuals experience a considerable increase in medical expenses after retirement. You can use your RA to accumulate funds in order to cover those medical expenses in a tax- efficient way. Although your annuity income will be taxable, it is also tax deductible to such an extent that you can use it to pay your medical bills.
5Surplus contributions (amount exceeding the permitted annual deductions) can be transferred to future years. Alternatively, it can be used to increase the taxexempt amount at (and thanks to more recent amendments, after) retirement.
6There are no tax implications ( i ncluding capital gains tax and dividend withholding tax) on any transactions performed, or i nvestments within an RA. The RA only becomes taxable at retirement.