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SUB CATEGORIES General |  Savings & Investments |  Annuties | 

Saving tax-efficiently for your retirement is a must

30 January 2020 Jan van der Merwe, Head of Actuarial and Product at PSG Wealth

The end of the financial tax year is just around the corner, and this is an opportune time to check if you are using tax-efficient savings effectively to fund your retirement. Retirement annuities (RAs) remain one of the best ways to save tax-efficiently for retirement, and this article reviews some of the key features of RAs.

What all RAs have in common
The basic features of a retirement annuity are governed by legislation, so you can expect similarities between them, regardless which product provider you select. Some of the common features:
• There’s a limit on the tax deductibility of contributions: 27.5% of the greater of taxable income or remuneration, capped at R350 000 per year.
• RA investments are required to adhere to Regulation 28 of the Pension Funds Act, which limits the allocation you can make to certain asset classes.
• Investors pay no tax on the growth in the investment.
• RAs are only accessible at retirement (from age 55), with a few exceptions. You can only withdraw one-third in cash at retirement. The rest must be used to buy an annuity that provides an income during retirement.
• RAs are protected from creditors.

What differences are there between RAs?
Basic differences between product providers include fee structures, fund choices and contribution amounts. In addition, there are differences in service levels, administration turnarounds and communication. Bear in mind that RAs are typically long-term investments, and although you can transfer your RA between providers, ideally you need to envision a long-term partnership with your provider.

It’s important to use each year’s taxable allowance
If you have some spare savings it’s a good idea to use as much as possible of this year’s tax allowance, otherwise you’re missing a year in which you could have realised tax savings. Consider whether you can start a virtuous cycle of using the tax saving generated by each year’s contribution to further invest in your RA.

Retirement annuities and emigration
People often ask about what would happen to an RA if they were to emigrate. An exception applies to the normal rule of ‘no withdrawal before age 55’ if you officially emigrate or relocate on the expiry of a temporary resident visa. It is worth remembering that the tax deductibility of contributions, plus tax-free investment growth and favourable tax rates when emigrating, still makes an investment in an RA an attractive option. A withdrawal will be taxed in terms of the lump sum benefit table. Currently, the first R500 000 can be taken tax free.

Selecting the right funds within your RA
It is important to select the right underlying funds within your RA to enable your investment to grow as much as possible at a reasonable level of risk. Regulation 28 limits how much you can allocate to certain asset classes, with the aim of protecting retirement savings from excessive risk.

Using other tax-free savings to supplement your retirement savings
We are often asked which is better: an RA or a Tax Free Investment Plan (TFIP). The tax deductibility of contributions to an RA and favourable tax treatment at retirement make an RA the theoretical best choice for retirement savings. A TFIP can offer a convenient way to supplement your retirement savings, and its flexibility makes it attractive if you want access to your funds before retirement. A TFIP also provides more flexibility when it comes to the underlying asset allocation, i.e. Regulation 28 limits do not apply to a TFIP.

Tax efficiency remains a key consideration when saving for retirement
While saving for retirement can seem daunting, you are far better positioned to achieve your retirement savings goals if you invest in tax-efficient savings products. If you are in any doubt about the best way to structure your retirement savings, it is well worth investing in advice from a qualified financial adviser to help you navigate some of the biggest financial decisions of your life.

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