Retirement annuities: ‘One of the most powerful ways to save’
It is no secret that South Africans are still not saving enough, specifically for retirement. With so few being able to retire comfortably, opening a retirement annuity (RA) is a good way to achieve a life of comfort post-retirement.
“A retirement annuity has many benefits and is one of the best ways to save towards retirement,” says Bongani Mageba, Stanlib retail managing director. “They are hugely tax-efficient, even more so over the long term, but over and above their tax benefits, the advantages go much deeper. While they give an investor the f inancial discipline to save throughout their working life, they are also f lexible enough to allow for contribution breaks in-between, if needed.” TAX BREAKS AND THE BEAUTY OF COMPOUNDING Tax benef its over t i me can have a significant effect on how well one retires. For example, R100 000 (assuming marginal tax rate of 40%) invested pretax in an RA unit trust versus a posttax investment of R60 000 in a direct unit trust could dramatically affect one’s savings levels at retirement. The difference over a 20-year period could be more than R723 000 i.e. R1.37m versus R560 000 (calculated on average return of a balanced fund of 14% per annum over the past decade and the tax impact of the two investments).
Contributions to RAs are gross of tax, meaning that all savings into an RA are at a marginal tax rate of up to 40%. Thereafter, all income in the RA is tax free. There is no tax on interest; capital gains tax and the 15% dividend withholding tax are exempt within an RA; and the cost efficiency of RAs has improved over the years with total average costs having fallen from 2.5% to 1.5% and in some cases, as low as 1% a year.
“Currently, you can place 15% of your income a year in a pension tax-free, but in terms of new legislation this is due to be increased to 27% (but with a R350 000 p/a cap). This is especially useful for the selfemployed as an RA can essentially serve as a ‘personal pension plan’. So if you are not already placing 15% of your income in a pension fund, it is a very good idea to top it up. The growth of the capital within the RA over the next 20 years would also be tax free,” says Stanlib retail chief operating officer Anthony Katakuzinos.
“When compounded over a 20-25 year investment life cycle, these tax benefits make a substantial difference to a retiree’s monthly income, potentially by more than 20%. This is significant when compared to other investments, and could make a real difference to an investor’s standard of living in retirement,” explains Katakuzinos. PENSION PLANS ARE SELDOM ENOUGH: A UNIT TRUST RA IS A GOOD SUPPLEMENT Investors are advised against relying solely on a compulsory pension plan to fund their retirement. Although they have a place in a well-diversified investment portfolio, South Africans should also save over and above their pension fund contributions, where possible. An RA is a good way to do this.
Stanlib recently launched a unit trustbased RA which is a tax-efficient, lowcost, discretionary savings vehicle suited to all investors.
While an RA is also an ideal way to supplement one’s pension plan, it is an absolute necessity for someone with no other retirement provision through a formal employer to fall back on.
This is the case for many budding entrepreneurs who are opting out of corporate life to run their own businesses. Unit trusts are an excellent underlying investment for RAs, says Katakuzinos. Among the benefits in Stanlib’s unit trust RA offering are potential outperformance, as well as being fully transparent, costeffective and f lexible.
Investors leaving formal employment can replace their forfeited corporate employee benefit scheme with an RA. The RA is structured so that during the uncertain start-up phase of a business they can make relatively small contributions of R500 a month and build up that amount as the business f lourishes.
It’s also possible to make lump-sum payments into an RA, which suits the sometimes variable nature of income in a small business. Importantly, in the event of a f inancial difficultly, one can stop payments if necessary without incurring penalties. NEWLY-REFRESHED RAs OFFER FLEXIBILITY “Stanlib’s new retirement annuities give investors the freedom to move between portfolios without penalties, and they can be used either for post- or pre-retirement purposes,” says Katakuzinos.
RAs have had a major overhaul of late, and for this reason many investors are switching out of older-generation RAs into modern ones. Previously, one was tied into contributing a certain amount for a defined period – with penalties if the terms of the contract broken. The penalties are limited by law to 30% on RAs sold before 1 January 2009, and 15% on RAs sold after 1 January 2009.
Although new pension reform limits were expected to come into effect last year, this did not materialise. Katakuzinos says that despite the lower 15% of taxable income calculation, investors wanting to take advantage of the uncapped limit, especially the self-employed, should do so while they can.