Your retirement annuity is better than you think

Leading life assurer Liberty Life has reassuring news for ‘deckchair strategists’ who are back from the holidays and traditionally turn to their financial planning at this time of year.

‘Your old retirement annuity is better than you think’ is the gist of the advice from the life company. In fact, new tax rules have reinvigorated this tried and trusted pillar of strategic planning.

Frank Schutte, head of Liberty Life’s individual life commercial unit, comments: “There’s nothing like a break in the bush or in a deckchair on the beach for getting people to reflect on the future. Every year people return from holiday determined to implement a proper financial strategy only to let things slide as workaday pressures intervene.”

This year there’s less excuse than ever for putting off financial and retirement planning.

“It’s been a ‘summer of love’ for the taxman,” says Schutte.

“He’s made some big-hearted amendments to the tax treatment of retirement provision. Our advice to deckchair strategists is to follow SARS’ lead, update your approach and use the new tax rules as your starting point for post-holiday strategy sessions.

“You’ll find that a product like a retirement annuity (RA) is an even better vehicle for tax-efficient planning than you thought.”

The RA owner can get a deduction on contributions during the life of the RA, and a tax-break on the investment growth within the RA (following the removal of the 9% tax on retirement funds in 2007 which taxed specific income in the fund). ).

The tax concessions that owners receive on retirement have also been overhauled. Previously, the tax-free portion of a retiree’s cash lump sum was generally determined as the greater of R120 000 or R4500 multiplied by the number of years of membership in the fund. Under new rules, the first R300 000 of a lump sum taken from a retirement fund, is tax free while the second R300 000 is taxed at 18%. This rises to 27% on a third R300 000 (R600 001 to R900 000) while the portion of the lump sum above R900 000 attracts tax at 36%.

At the same time, a new generation of highly flexible and extremely cost-efficient RAs is being marketed.

Schutte explains: “Previously, upfront costs calculated over the full term of the product contributed to some negative consumer perceptions around RAs.”

“These charges have been significantly reduced following discussions between the life industry and the authorities.

“Simultaneously, we see a trend to flexible short-term RAs taken out for top-up purposes by people who, on reflection, realise they need extra provision.

“Falling slap bang in the middle of this category of consumer are those returning from holiday with a new-found determination to do something about their future financial wellbeing.”

Short-term RA top-up can be as little as a one-year, once-off commitment – a route favoured by people with variable income who find bonuses or other remuneration adding to their tax exposure.

Commitment to an RA evens out a ‘lumpy’ income stream in a tax-efficient manner.

Schutte notes: “The holiday tan soon fades … but that’s no reason for your commitment to proper financial planning to wane at a similar rate. Call in a professional financial planner and engage in comprehensive planning.

“We recommend the logical process endorsed by the Financial Planning Institute and suggest you start sooner rather than later.”