Retirement Annuities (RAs): No longer the obvious choice

For many years, the benefits of retirement annuities (RAs) have been advocated, mainly due to the generous tax concessions available. However, two major events will require FSPs to consider options to complement RAs in making retirement provision.

Currently, up to 15% of non-retirement funding income may be deducted from your tax liability at your marginal tax rate. The investment growth is also tax free and upon retirement there is up to R315 000 available, tax free. As such, for most investors, an RA is the most efficient investment when compared to the alternatives, but this is about to change.

Major changes

Firstly, the new tax law around retirement provision comes into effect in March 2012. Under the new regime, you are only allowed to deduct retirement funding contributions up to a maximum of R200 000 per annum. This brings a whole new dimension to the retirement planning arena as alternative investment vehicles now need even more consideration since they are on par with RAs in terms of tax concessions on contributions.

Secondly, the amendments to Regulation 28 will soon be due for implementation. Portfolios underlying RAs will be restricted in terms of the allocation to some asset classes. To ensure long-term inflation-beating returns you need a sizeable allocation to local equities and other real assets such as property and foreign equities. Regulation 28 will restrict the extent to which this can be done within an RA, thus further strengthening the argument for alternative investments.

Considering the alternatives

RAs should still be utilised to make full use of the tax concessions but some investors would require additional funding in order to secure a comfortable retirement. Others may benefit from having increased exposure to certain asset classes that are not allowed within an RA. Whatever the situation, the various options that are still available to fund retirement should be carefully considered.

Life insurers and certain asset managers offer endowments and unit trusts that could be used in addition to an RA when making retirement provision.

Endowments

This investment vehicle still offers tax concessions in the sense that the return is taxed at 30%. Endowments mature after five years, providing full access to the funds at this time. It is thus a suitable investment vehicle to save for retirement outside of an RA, if there are more than five years to retirement.

The portfolios underlying the endowment are also not restricted by Regulation 28, allowing investors to select the portfolio that best suits their long-term growth requirements. At retirement, investors can elect to draw from the endowment without paying income tax on the withdrawals. Proceeds may also be used to buy a voluntary purchase life annuity.

Endowments have somewhat gone out of favour with investors but the above changes, once again, highlight the benefits of an endowment wrapper. Life insurers can also provide value added benefits under an endowment such as premium waivers and investment guarantees. These should all form part of a well structured pre- and post-retirement plan.

Unit trusts

Unit trusts are very liquid and are suitable for both short- and long-term investments. Unfortunately they don’t offer any tax concessions and investors are liable for any income or capital gains tax in their personal capacity. However, unit trusts could still be utilised, in particular, when an income tax or capital gains tax exemption is still available.

But even if this is not the case, an investor may benefit from this investment due to its liquidity and portability.