Many people have negative perceptions about retirement annuity. I must state categorically that this is a powerful tool in any investor’s financial and tax planning. A retirement annuity is a long-term investment structure for building retirement savings, either on a recurring basis or by making a lump sum investment. A retirement annuity offers significant tax advantages to people who are committed to investing their money until they are at least 55 years old. A portion of your retirement annuity contributions is tax deductible. The current legislation allows you contributions to retirement funds of up to 27.5% of your taxable income as tax deduction, subject to a maximum of R350,000 in a tax year. All your investment growth, including interest, dividends and capital gains within a retirement annuity is tax free.
At retirement age, you may withdraw a portion of your retirement annuity account tax free. Currently the first R500,000 lump sum benefit is tax free. The balance of the account will be used to purchase a fixed annuity or living annuity, to give you a monthly income. You can select the underlying investment portfolios in a retirement annuity. These investment portfolios are compliant with Regulation 28 of the Pension Funds Act, to ensure your money is invested prudently across a number of asset classes. Before retirement, there are three scenarios where you may access money in your retirement annuity account: In the event of your death, the money is paid out to your beneficiary. In the event of ill health and you are unable to work, you lodge a claim for a disability benefit – and not a withdrawal benefit – from your retirement fund. When you emigrate or when you leave South Africa due to an expired work visa, you can withdraw the full value in cash (subject to tax). There are two types of retirement annuity products: Life assurer retirement annuity and unit trust retirement annuity. With a life assurer retirement annuity, you enter into a contract to commit to pay contributions until your selected retirement age. Should you reduce or stop contributions during the first half of the term, you will pay a penalty charge, which reduces your retirement annuity account value. Some life assurers will reward you with bonuses paid into your account for being disciplined with your monthly contributions over the term of the contract. While a life assurer retirement annuity is rigid, a unit trust retirement annuity gives you flexibility. You may increase, reduce or stop contributions at any time without penalties. You may wish to consider investing in a retirement annuity fund if:
A word of advice: If compound interest is the first Financial Wonder, then I consider retirement annuity to be the second Financial Wonder in South Africa.
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