30 July 2020
Long-Term investing can be a daunting experience for anyone, putting your hard earned cash away for lengthily periods of time puts people off thinking about long-term investing.
One of the biggest problems we face as South Africans is not saving enough money towards retirement, there are 3 reasons for this in South Africa:
- Not contributing enough money monthly towards retirement.
- Having the incorrect asset allocation for your investment and not diversifying your asset allocation yearly as the economy changes.
- Starting too late; The earlier you start, the earlier you will be able to retire or the more comfortable you will be once retired.
A lot of people overlook the benefits of having a retirement annuity in place, especially the fact that it is completely tax-free. The government noticed how big of a problem saving towards retirement is in SA so they have tried to make it as attractive as possible, however do not forget to submit your yearly tax returns on the CONTRIBUTIONS you make towards retirement, please do not forget these contributions are still taxed.
Retirement Annuities are subject to an annual maximum of 27.5% of taxable income capped at R350 000 per year. Retirement Annuities are also extremely attractive investment vehicles for business owners as well as for people with irregular incomes, ad hoc bonuses and commissions. I have already heard this a few times so I thought I would address this; If you are currently contributing towards a employers pension or provident fund but are not making use of the full 27.5% tax deduction, I highly advise setting up a retirement annuity to invest the balance of your tax-deductible premium, if you’re not keen on a RA then I advise you look into a tax-free saving account. Please also keep in mind a provident fund is just another name for a pension fund, this capital provides an employee with lump sum payments at the time of exit of their current place of employment.
A Retirement Annuity has huge tax benefits which one should not ponder upon, 27.5% of your taxable income(subject to the R350 000 per year max) can be contributed on a tax-deductible basis. On top of that there is no income tax or capital gains tax charged on the investment returns with an RA, also the funds housed in your RA do not form part of your estate which means that this money will not be subject to estate duty or executors fees. Upon the selected retirement age by the policyholder, investors are allowed to withdraw up to one-third of the full value of the of their retirement annuity, the first R500 000 of the total withdrawal is also tax-free.
Access to funds: An investor may only access the funds in their RA at the age of 55 onwards, with formal emigration from South Africa and early retirement due to ill-health being two exceptions. Please note that through emigration from South Africa and where the emigration is recognized by SARS, you will be permitted to withdraw the funds subject to tax. Once retired and you have withdrawn one-third of your investment, the remaining two-thirds must be used to purchase a life or living annuity to pay you an monthly income for your retirement.
Transferring funds into another RA: Most retirement annuity funds allow investors to transfer their funds into another retirement annuity. This process can be done in terms of the section 14 of the Pension Funds Act.
Beneficiaries: You can select beneficiaries for your retirement annuity however, in terms of the Section 37C of the pension funds act, trustees will make the final decision in terms of the equitable distribution amongst your dependents and beneficiaries.
Retirement planning is one of the biggest issues we face in South Africa (with stats showing only 6% of people are able to retire in comfort) and is one which I plan on tackling head on, I would like to help as many people reach their short, medium and long term financial goals as I possibly can. The sooner you start, the better off you will be when it comes to your retirement.