Re­tire­ment an­nu­ities: ‘One of the most pow­er­ful ways to save’

Finweek English Edition - - INSIDE - BY RACHEL LAI­LEY

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.

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