Tax breaks not the only reason to invest in RAs

Self-employed individuals and investors who want to make additional contributions towards their retirement savings may find the tax breaks associated with retirement annuities (RAs) appealing.

Generally speaking, individuals tend to think of these tax breaks as the refund they receive from the South African Revenue Service (Sars) after they’ve completed their tax returns, says Mariska Redelinghuys, retail legal advisor at Sygnia.

Currently, taxpayers may deduct the greater of 15% of their non-pensionable salary (the part of their income that is not used for contributions to a pension fund vehicle), R3 500 less their current pension fund contribution or R1 750 as the deduction with regard to their RA contributions.

From March 1 however, the tax treatment of all retirement vehicles (pension funds, provident funds and retirement annuities) will be streamlined and taxpayers will be able to claim a deduction of up to 27.5% of the greater of their remuneration or taxable income up to a maximum R350 000 per year.

While these tax deductions may be the most appealing attraction of an RA in the short-term, contributions are also allowed to grow tax-free within the RA, which is a significant benefit in the long-term. Just like fees, tax can have a major impact on performance – especially over long periods of time, Redelinghuys says.

Yet, tax breaks are not the only benefit associated with investments in RAs.

Protection

One of the main benefits of investing in an RA, is the protection it provides.

This is important, because for most individuals this is the largest investment they will make during the course of their life and it needs to enable them to fund their lifestyle in retirement, Redelinghuys says.

Investments in an RA must comply with Regulation 28 of the Pension Funds Act. This means there are limits to the exposure to certain asset classes (offshore assets and property for example), which in turn protect investors against volatility and risk.

But the vehicle itself, also offers considerable protection, she says.

“When I was a financial advisor I used to tell my clients that it protects you against yourself, because you can only access the money when you turn 55.”

Although there are certain exceptions to this rule, generally speaking investors won’t be able to use the money before retirement age.

This requirement protects investors against the urge to withdraw funds from their RAs to buy a house or to go on holiday, Redelinghuys says.

Contributions to the RA are also protected against creditors.

If there is a judgment against an investor due to outstanding debt (for example a clothing account or at the local municipality) the creditor may only take R3 000 per annum of the value of the RA into account to settle the debt, even if the outstanding debt is much more than this and the individual has no other assets.

Redelinghuys says an investment in an RA is also excluded from the individual’s estate in case of insolvency.

Finally, there is also protection for the individual’s dependents. The money in an RA is excluded from the deceased estate, which means the money in the RA can go directly to the individual’s dependents. In terms of the Pension Funds Act, the trustees must pay the money to the individual’s actual dependents, she says.

Flexibility

Investors are allowed to increase or stop their debit orders and can make ad hoc lump sum contributions during the course of the tax year. They are also allowed to choose the underlying investment funds in the RA.

In an employer-sponsored pension or provident fund there are generally less investment options and the money is deducted from the individual’s salary with limited flexibility, she says.

Financial independence

The statistics around retirement are well-known: Very few South Africans are in a position to fund their current lifestyle when they retire and therefore it is important to take precautionary steps to prevent this from happening by starting to save early and keeping it up over time.

Brought to you by Moneyweb