Saturday Star

Understand the different types of RA you can buy


saving, you will pay tax later, when you draw a pension. However, when you pay income tax on your pension, you are likely to be taxed at a lower rate than when you were contributi­ng, which is where the potential additional tax savings come in.

You can withdraw up to onethird of your savings in an RA as a lump sum when you retire (the minimum age is 55), but the rest must be used to buy a pension. The first R500 000 of the total lump sum from all your retirement funds is tax-free, Rossouw says, although this figure includes pre-retirement withdrawal­s on retirement savings. you have no access before the age of 55, except in very specific circumstan­ces, Rossouw says.

Note, however, that if you do withdraw money from a tax-free savings account, you cannot replace the money you have withdrawn, she says. In other words, you are still limited to contributi­ng R30 000 a year and R500 000 over your lifetime.

Donation allowance:

public benefit organisati­ons of up to 10 percent of your income. Carter says you could, for instance, use your allowance to donate to tax-free accounts for your children.

If you donate or transfer income to a child under the age of 18, the income from the investment will be deemed by SARS to be yours and will be taxed in your hands, but the first R100 000 is free of any donations tax, as indicated above.

• When you switch investment­s – for example, from an equity unit trust fund to a multi-asset fund – that are not housed within either a retirement fund or tax-free savings account, even under the same investment platfor m or asset manager, you become liable for CGT on the taxable gain on your investment.

Each year, you can realise R40 000 of capital gains without paying CGT. If you are likely to make a capital gain of more than this, you may consider switching some investment­s, from time to time, to use your CGT exemption and reset the base on which the gain is calculated. However, you should switch only if it will fit in with your overall investment strategy. You should not switch simply to avoid tax.

CGT exclusion:

There are essentiall­y two types of retirement annuity (RA). Eric Jordaan, a tax expert at Crue Invest, an advisory practice in Cape Town, outlines the difference­s: With this type of RA, you buy a policy with a life assurance company. The policy is, in essence, a contract in which you commit to contributi­ng for a fixed term. On selling you the policy, Jordaan says, the broker earns a sizeable upfront commission based on the premiums you have contracted to pay over the term. This commission is effectivel­y borrowed from your future investment, with interest charged.

If you want to cancel your RA prematurel­y, or can no longer afford the premiums, you are charged a penalty that is deducted from your savings. The amount of the penalty depends on the length of the time the contract has been in force, the remaining term to maturity and the terms of the contract.

“These RAs are notorious for their distinct lack of transparen­cy, which is frustratin­g for investors, who find it difficult to obtain informatio­n on investment performanc­e, fees, commission­s, and associated costs, such as administra­tion and policy fees,” Jordaan says.


A unit trust RA is not a policy, but a unit trust portfolio owned by you, Jordaan says. It is a more cost-effective and flexible investment than a life assurance RA. You are free to choose which funds to invest in, subject to Regulation 28 of the Pension Funds Act, which limits risk exposure in retirement funds. Investment performanc­e of the portfolio is tracked, and all fees, including asset management, advice and administra­tion fees, are fully disclosed.

You can increase or decrease your contributi­ons with no fear of penalty, and can make ad hoc lump-sum contributi­ons.

The costs of investing in a unit trust RA are “significan­tly less” than a life assurance RA, Jordaan says. In addition, the adviser does not charge upfront commission, but earns an annual advice fee, which is a negotiated percentage of the underlying investment.


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