Retirement annuities now even more attractive

The recent increase in dividends tax to 15% from 1 April 2012 will make retirement annuities an even more attractive way to save for the long term, says Louis van der Merwe, financial planner at Mazars Financial Services. Because returns inside retirem

Figures show that reinvesting dividends from a pure equity portfolio over the last 40 years would have increased your annualised return from 14.15% to 19.37%. The chart below shows the effect of reinvesting your dividends from the JSE All Share Index between 1971 to end-2011.
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Because RA’s are exempt from DWT, a dividend of R100 will actually retain its value, whereas the same dividend in a voluntary investment such as a unit trust will be worth only R85.

“In other words, going forward, the dividends reinvested in a voluntary investment will be 15% less than dividends reinvested in an RA due to the 15% tax levied on dividends, which will have an impact on wealth creation over the long-term,” van der Merwe says.

Retirement funds are also exempt from capital gains tax (CGT), tax on interest and (local and foreign), dividend tax (local and foreign), as well as tax on rental income.

In terms of tax deductions, contributions are deductible to the maximum of 15% of your non-retirement income (including bonuses, commission, overtime, fringe benefits); or R3 500 less allowable pension fund contributions or R1 750.

“While your proceeds will be taxed when you retire, the first R315 000 (subject to a third of your fund value) may be received in cash, tax-free, and the balance transferred to a living annuity tax-free. The income withdrawals from the living annuity will be seen as taxable income.

In the event of death, your RA will fall outside of your estate and not attract estate duty, CGT or executor's fees and the proceeds will be paid out to your dependents. Retirement annuities are also protected against third party creditors.

Over the years, traditional RAs have earned a bad reputation due to exorbitant fee structures, policy charges and the massive commissions paid by life assurance companies. “Investors may not notice these fees but experience them in the form of low returns,” he says.

Advisors can receive up to R8,000 commission for a R1,000 per month RA sold through a life company, compared to a unit trust RA , where the advisor can receive a maximum of an initial 3% fee (R30 per R1 000 contribution) with an annual fee capped at 0.5%, or 1.5% initial fee and 1% per annum based on the fund value (R10 per R1000).

“If you can afford the minimum contribution of R500 per month for a unit trust-based retirement annuity, there is no reason why you should be advised on any other type of RA,” van der Merwe concludes.