Retirement Annuities remain a good estate planning tool

The opportunity to make additional provision for retirement, together with the potential for tax, and estate duty savings, will ensure the continued popularity of retirement annuities as an estate planning tool.

What is estate planning?

The most widely recognised definition of estate planning is that it is the arrangement, management, securement and disposition of a person’s estate so that he, his family and other beneficiaries may enjoy and continue to enjoy the maximum from his estate and his assets during his lifetime and after his death.

Using a retirement annuity provides a viable alternative to traditional estate planning instruments. Here are some reasons to consider RAs:

• From an estate duty perspective, the amount contributed to an RA is removed from your estate immediately. Both the lump sum (accruing after 1 January 2009) and the annuity are not subject to estate duty.

Contributions to an RA, as opposed to donating the amount to a trust, will allow the money to be taken out of the estate without attracting donations tax, but with the added benefit of an income tax deduction.

Individuals are allowed to donate up to R100 000 per tax year (R200 000 for couples) without incurring any liability for donations tax.

Donating assets to a trust will trigger anti-avoidance provisions in the Income Tax Act; income that arises in the trust may be taxed in the hands of the person who donated assets to the trust. In addition, investments within a trust don’t qualify for interest exceptions. Investment growth in an RA is tax-free – it attracts no income tax or capital gains tax (CGT). Had the build-up taken place in the investor’s estate, the payout could potentially be reduced by up to 20%, being the current estate duty rate.

Further, investors are protected in the case of insolvency, however there is potential exposure in the case of divorce. A trust that is not managed correctly runs the risk of being attached as a “sham” trust and therefore the assets inside the trust are exposed.

• It is well-known that the contributions to a retirement annuity are tax deductible. What is less well-known is that certain retirement annuities provide the member with access to a portfolio of shares managed by a stockbroker. Seen in this light, the RA contribution can be compared to a direct investment into a portfolio of shares on the JSE, at a 40% discount.
• Profits made on share trades are also exempt from CGT.
• After retirement from the retirement annuity – where a living annuity is chosen – the annuitant can regulate the income flow to suit his/her income requirements and income tax obligations. Annuities can be regulated between the current minimum, being 2.5% and the maximum of 17.5%. Unlike with other income-generating investments, surplus income does not accrue to the annuitant but continues to grow, tax-free, in the fund underlying the annuity.
• Emigration is often a consideration in estate planning. Benefits within a retirement annuity fund may be withdrawn on proof of formal emigration. The withdrawal amount, in excess of the R22 500 tax-free amount will be subject to income tax according to the fixed scales applicable to all retirement fund benefits.

For example, if a client makes a R200 000 contribution to a retirement annuity and claims a 40% tax deduction, the actual cost is R120 000. Assume that the amount is invested for five years and the fund grows at 10% p.a. The fund value will be R322 102. At that point the client decides to emigrate and withdraw the benefits from the fund.

Taxable Benefit R322 102

Taxed at 0% R 22 500

Taxable R299 602

Tax R 53 928*

*Subject to the rules of the RA fund allowing for such a withdrawal.

Legislation in respect of the above is not yet promulgated.

• With the amendments to the income tax act this year, the maximum retirement age (69 at last birthday) was abolished. This has two immediate implications:

- A member need never retire from a retirement annuity. So the income for the surviving spouse / beneficiaries can be postponed until after the planner’s death.

- A whole new retirement annuity market has opened for clients who are older than 70 who still require tax relief or who simply wish to remove assets from their estate for estate duty purposes. (Note that this is only applicable in respect of RA funds whose rules have been amended to allow for such a withdrawal).