Providing more than just a pension...protection and peace of mind

There are many ways to save for retirement. Some clients invest in property, hoping that rental income will provide an income stream in retirement as well as capital growth to provide a legacy for beneficiaries; others play the stock market or even the good old stash under the mattress approach. All of these methods could result in a nest egg for retirement, but the efficiency of a retirement annuity should not be underestimated. A retirement annuity provides so much more than just a pension for your retirement years.

Protection from temptation

An investment in a retirement annuity cannot be accessed until at least age 55 unless the member needs to retire early due to ill health etc. This ensures that your nest egg remains untouched and protected from the temptation to use the funds to reach short term goals. This allows you to benefit from the effect of compound interest and effectively growth on growth, giving you a higher return in the long term.

Protection from creditors

Not only does a retirement annuity protect you from yourself it also protects you from creditors (except in cases of maintenance and divorce orders).

This is especially valuable to those client’s who are self employed. If your client is declared insolvent, his creditors will not be able to access the accumulated funds in his retirement annuity. He will then be very grateful for the funds when he reaches retirement as any other assets that he invested in, may not have had the same protection and been sold off to satisfy creditors. Hopefully he will be back on his feet or at least rehabilitated by the time he reaches retirement age as once any of the funds are paid out (eg: his 1/3 lump sum or monthly pension) they will be readily available for creditors to attach. If this is not the case and he remains at risk, he will have to decide between delaying his retirement and allowing the funds to be attached by creditors when they reach his bank account.

Protection from estate duty

As of 1 January 2009, estate duty levied on retirement funds was done away with. This means that if your client passes away prior to retirement the full amount in his retirement annuity will not attract estate duty. Given that estate duty is levied at 20% of any amount in excess of R 3.5 million, this is a significant saving, a saving that cannot necessarily be accomplished with other investment vehicles such as property etc.

Protection for dependants on death prior to retirement

The payment of a death benefit from a Retirement Annuity Fund is regulated by section 37C of the Pension Funds Act 24 of 1956. This means that when a member of a retirement annuity passes away prior to retirement, the trustees will have to apply the guidelines provided by this legislation to determine how the benefits will be distributed, even though there may be a beneficiary nomination. Preference may well be given to those who were legally or factually dependent on the deceased.

Protection from tax

For many clients this benefit is the most obvious. In fact this may be their main motivation for investing in a retirement annuity. The tax benefits associated with a retirement annuity are vast and include:

· Tax deductions on contributions

Contributions to a retirement annuity are tax deductible up to certain limits in terms of the Income Tax Act. The taxpayer contributing is entitled to a deduction of at least R 1 750 pa, which may increase to up to 15% of the taxpayer’s non retirement funding income, depending on how his/her package is structured.

· Growth within the fund

Retirement annuities fall into the untaxed fund, in terms of the Four Fund Approach, and thus growth within the fund does not currently attract tax. If your client compares his return from his retirement annuity with his return on any other investment product provided by an insurer, his returns should be significantly higher.

· Tax on retirement

On retirement, a client’s lump sum is currently taxed as follows:

Although the above benefits are extremely attractive, we must bear in mind that at the end of the day, a client should be investing in a retirement annuity with the primary goal being to have sufficient capital at retirement to retire comfortably. Planning for retirement is a long term strategy and one never knows what will happen along the way. A retirement annuity is one way to ensure that he achieves his goal, and also give him peace of mind and valuable protection along the way.