Best way to house pension funds
TIPS: UNPACKING THE COMPLEX – EVERYTHING TO KNOW ABOUT RETIREMENT ANNUITIES
Should you keep contributing on your investment regularly or on an ad hoc basis?
From tax advantages and disciplined savings to investment growth potential, retirement annuities (RAs) can be effective for housing one’s retirement funds. There are, however, complexities to be navigated when investing through a retirement annuity, some of which are unpacked below.
You can transfer your insurance RA to a unit trust platform
If you have a traditional, insurance-based RA in place, it’s important to know that you can transfer your policy to a unit trust platform, although it is advisable to first understand if your insurer will charge any cancellation fees for doing so. The process of transferring a RA from one service provider to another is governed by Section 14 of the Pension Funds Act and can take a number of months to complete.
If you’re contemplating such a move, your financial advisor should request costs from your current insurer and prepare a cost-benefit analysis for you so that you can make an informed decision. If you transfer your RA to a linked investment service provider (LISP) platform, no upfront commissions will be paid to your advisor, as in the case of an insurance RA, and your advisor will earn an advice fee that is
charged per annum as a percentage of your invested capital.
You can use a RA to preserve your retirement benefits
While a preservation fund is an excellent place to house the proceeds of employer-sponsored funds, keep in mind that it is not the only option available. Transferring your group retirement benefits into a RA structure has significant advantages that should be weighed against the unique features of a preservation fund. Specifically, if you transfer your funds into a RA, you are able to keep contributing towards the investment on a regular or ad hoc basis, whereas, in the case of a preservation fund, no additional contributions can be made. That said, whereas a preservation fund per
mits one full or partial withdrawal before the age of 55, you will not be able to access the funds in your RA before the age of 55.
You can invest in as many RAs as you like
You can open as many RAs as you like, although you need to be clear on reasons for doing so. Remember, you are permitted to invest up to 27.5% of your taxable income on a tax-deductible basis towards a RA, with this limit being applicable to the aggregate of all your contributions towards an approved retirement fund, meaning that there is no tax advantage to having more than one RA. If your RA is invested on a LISP platform, you can fully diversify your investment strategy, subject to the limitations of Regulation 28 of the Pension Funds Act, within a single RA, meaning that additional RAs will not create an opportunity for extra investment diversification.
RAs are more tax-efficient than TFSAs
When it comes to tax on investment returns, retirement annuities and tax-free savings accounts (TFSA) present the same tax efficiency for investors in that no tax is payable on any dividends or interest earned in either a RA or a TFSA, and there are no capital gains tax consequences. The major difference between the two investment structures is that your contributions towards a RA are tax-deductible up to 27.5% of taxable income, whereas your contributions towards a TFSA are made with after-tax money. As such, TFSAs become attractive investment vehicles once you’ve maximised your tax-deductible contributions towards a RA.
The funds in your RA are protected from creditors
Section 37B of the Pension Funds Act provides that the funds in your RA are protected from your creditors in the event of insolvency, although this does not mean that your RA funds enjoy complete protection from creditors. In terms of the act, certain monies can be deducted from your pension fund money, including money owed to Sars and amounts due and payable under the Divorce Act and Maintenance Act.
Your over-contributions will roll over
While your tax-deductible premiums are limited to 27.5% of your taxable income per year up to a maximum of R350 000, keep in mind that you are not prevented from investing beyond this threshold. Any over-contributions made towards your RA will be rolled over to the following year where they can be used for tax deduction purposes in that year. The advantage of this is that the over-contributions will still enjoy investment growth, even though the tax benefit will only be gained in the following year.