What is an RA and how does it work?
A retirement annuity is a tax-effective retirement investment, which is designed for individuals who want to save towards their retirement. This may be in addition to your existing pension or provident funds that you already participate in through your employer.
The benefits of having an RA
An RA has several benefits other than a tax refund on annual contributions: no tax on interest, dividends or capital gains while you remain invested; protection against creditors; and protection against yourself (you can’t touch the money until age 55) – to name a few.
What happens when you resign?
You can transfer your savings into your existing RA if you were contributing towards an employer pension fund.
When can I withdraw?
Here is where it gets tricky, the Pension Funds Act has the following rules in place when it comes to withdrawing your retirement savings:
- Withdrawals from RAs are not allowed, UNLESS the total invested amount is less than R15 000.
- Only if you are permanently disabled or non-resident for South African tax purposes for three years in a row, can you access your RA funds.
- Only once you turn at least 55 may you can access ONE THIRD of your RA savings as a lump sum.
- The remainder of your funds MUST be used to purchase retirement income either through a living annuity or a guaranteed life annuity.
Living annuity vs guaranteed life annuity
Living annuity:
A living annuity allows you to select an annual income drawdown percentage of between 2.5% and 17.5% per annum. You can select an income frequency of monthly, bi-annual, quarterly or an annual payment. This income percentage can be changed – but only once a year on the anniversary date of the investment. This gives you more flexibility and the ability to draw a higher income if needed.
Life annuity:
A life annuity secures you a pre-determined monthly income for the rest of your life. This product is provided by a life insurance company, where you hand over to the company the lump sum of the retirement saving and they take on the obligation to pay you an income for the rest of your life.
The income may be a fixed rand amount, or it might be inflation-linked, or you can add a spouse benefit with a guaranteed payment term.
When should you start saving?
Well, the earlier you start, the better off you will be.
Assuming that you will be comfortable living off 75% of your pre-retirement salary, research indicates that saving 17% of your salary is a reasonable starting point for the 25-year old saver.
This amount increases dramatically the later you start. You need to save 22% if you start saving at 30, up to 42% if you start at 40, and up to 59% if you start at 45.
How much should I contribute monthly?
Assuming that you will be comfortable living off 75% of your pre-retirement salary, research indicates that saving 17% of your salary is a reasonable starting point for the 25-year old saver.
This amount increases dramatically the later you start. You need to save 22% if you start saving at 30, up to 42% if you start at 40, and up to 59% if you start at 45.
Start saving for your retirement now:
ryno@louwnet.co.za 0645335339
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