Top-up your retirement savings with a unit trust-based retirement annuity

With the end of the tax year looming, it’s time to think about topping-up your retirement annuity (RA) with additional contributions. Perhaps you’ve earned a bonus, or put aside money for a rainy day that never came. If you’ve contributed less than the maximum tax-deductible amount to an RA to date, you may want to use your additional cash to top it up and enjoy the full tax benefit allowed by SARS. If you don’t already have an RA, consider investing in one.

“The fact remains that increasingly investors have to make provision for their own retirement savings. If you have any spare cash you should think about rewarding yourself with long-term financial stability, instead of short-term purchases,” says Jeanette Marais, deputy director of distribution and client services at Allan Gray.

As an investment product, RAs have a number of advantages – if properly structured. The biggest advantage is their tax-efficiency. RAs were originally developed to give self-employed people the same incentive to save for retirement as employees of companies with pension funds.

“RAs that give investors access to unit trusts are excellent savings vehicles for retirement over the longer term,” according to Marais.

Most are offered with low product fees, no penalties for surrender or discontinuation and fully transparent and negotiated financial adviser fees. They also offer choice and flexibility – you can choose which underlying funds to invest in, and switch between funds at no extra cost. However, you cannot access your money until you turn 55 (unless you are permanently disabled, the value of your savings is under R7000 or you are emigrating).

If you are self employed, or your employer does not offer a pension/provident fund, your income is considered ‘non- retirement funding’. If you are a member of your employer’s pension/provident fund, your income is known as ‘retirement funding income’.

However, you may still earn non-retirement funding income, such as a bonus or car/entertainment allowance, and can contribute the greater of 15% of your non-retirement funding income, R1 750, or R3 500 less your allowable pension fund contribution, to an RA tax free. Income earned on your investment over the time up to when you retire is also tax free.

Any additional payments (over the 15% limit) may be carried forward and offset against future taxable income.

At retirement, a minimum of two-thirds of the capital in your RA must be invested in a pension-providing vehicle such as a living annuity or guaranteed life annuity. This ‘transfer’ is tax free. Your annuity income is taxed at your marginal rate, which may be lower than your tax rate prior to retirement.