The Ins and Outs of Retirement Annuities

You may be nearing the age for retirement, or simply preparing for your future. Whatever the case may be, it’s important to understand the importance of saving for retirement and how it can benefit you. Unfortunately, the majority of South Africans fail to save enough money for retirement, with only around 6% of South Africans able to retire comfortably. Preparing for your retirement is probably one of the most important decisions you will make in your life. Read on as we discuss Retirement Annuities.

What is a retirement annuity (RA)

A retirement annuity is a retirement savings vehicle designed for individual investors. This type of savings vehicle offers a variety of attractive tax benefits to encourage people to save money for their retirement. Retirement annuities are ideal for people who:

  • Are self-employed
  • Don’t have access to a pension or provident fund through their employer
  • Want to supplement their pension/provident fund
  • Earn a significant amount of non-pensionable income (interest or rental income)

The tax benefits of an RA

RAs have the same tax benefits as pension and provident funds. You are able to deduct contributions to an RA fund up to 27.5% of taxable income or gross remuneration (whichever is the higher) for tax. This 27.5% limit, however, applies to the total contribution to all funds (pension, provident and RAs) with an overall tax-deductible limit of R350,000 per annum. One of the greatest advantages of an RA is that investment growth (dividends, interest, and capital gains) is tax-free, this enables maximum growth. You will only be taxed when you withdraw from your RA.

Access to your RA

The biggest limitation of a RA is that you are prohibited from accessing your funds before the age of 55, with some exceptions to access it earlier (permanent disability or emigration). At retirement or age 55, you may take up to one third of your RA as a lump sum (subject to retirement lump sum tax), unless the total value is below R247,500 – In this case, it can be taken as a lump sum. The balance of your RA value must be used to purchase an annuity, which will provide you with a regular income. This income will be subject to tax where applicable.

The first R500,000 of a lump sum withdrawal from your RA is tax-free, provided you have not previously made a withdrawal from another retirement fund. Please see the tax table below:

Retirement and Pre-Retirement lump sum withdrawal tax tables:

At Retirement Tax Rate Pre-Retirement Tax Rate
R0 – R 500,000 0% R0 – R25,500 0%
R500,000 – R700,000 18% R25 001 – R660,000 18%
R700,001 – R1,050,00 27% R660,000 – R990,000 27%
Above R1,050,000 36% Above R990,000 36%

Your retirement savings are extremely important as they will be your only source of income when you decide to retire. As mentioned above, the majority of South Africans cannot retire comfortably. At Affinity Wealth we want to change this! If you would like to discuss your retirement annuity or any other retirement product, please feel free to contact us, and one of our professional financial advisors will be able to assist you.

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