Why Invest in a Retirement Annuity?
No matter what life stage you are currently in, it is never too late (or too early) to start saving for retirement. Being able to retire with a preferred income that will sustain your current lifestyle in the post-retirement space is one of the ultimate goals of financial planning. Retirement Annuities are without a doubt one of the most advantageous retirement vehicles that will assist you to achieve your preferred retirement through setting up savings goals and objectives and reviewing your retirement plan in the process.
Budget for Retirement
Once you have established how much you need to save for retirement, stick to the plan by committing to the following steps:
- Start Contributing – Put away as much as you can as early as possible. The costs of saving too late (or too little) could mean a huge capital gap at retirement. Starting earlier will allow you to gradually increase your premiums whilst taking advantage of the compounding effect of portfolio returns.
- Maintain your Contributions – Keep up with inflation by setting up Annual Premium Increases, making Voluntary Premium Increases when getting a promotion or salary increase, and make Lump Sum Injections when you can. Remember, RA contributions are tax-deductible. The more you contribute, the more your tax refunds increase.
- Earn Post-Retirement Income – At retirement, you have to invest at least two-thirds of your Retirement Annuity in an Annuity Income Solution in order to earn an income. There are various types of income solutions to meet your specific needs at retirement, which range fromGuaranteed Annuities to Living Annuities or a combination of both.
Reasons to invest in an RA
Tax Efficient – A Retirement Annuity is a perfect retirement savings vehicle for the self-employed or as a top up to a Pension or Provident Fund. With new legislation which became active on 1 March 2016, we saw an increase in the percentage of your allowable tax-deductible contributions from 15% to 27.5% of the greater of your taxable income or remuneration, up to a maximum of R350 000 per year. This means that if you have an existing provident fund at your current employer to which you contribute 15%, you can now enjoy an additional 12.5% as an allowable tax deduction in an RA. An RA is exempt from tax on dividends and interest, and you won’t have to pay Capital Gains Tax (CGT) on the growth earned on your investment.
If you change employment and given a withdrawal benefit from your Pension or Provident Fund, you will be able to transfer the benefit into an RA, Tax-Free.
RA benefit not subject to Estate Duty – On death, any benefits paid either as an income or a lump sum is free from Estate Duty (ensure that you list all your dependants and/or beneficiaries in your RA). Only contributions (made after 1 March 2015) which exceeded the tax-deductible limits need to be included for Estate Duty purposes. Also to note, similarly to an Endowment and a Trust, the investment in an RA is protected against claims from creditors.
Make the most of your Retirement Savings:
- Increase your current retirement Fund Contributions.
- By contributing more to your retirement funds, your tax refund will increase.
- Thereafter, by reinvesting the refund back into your RA, will enhance your retirement savings. The more you contribute to your RA, the bigger the refund will be at the end of the tax year.
Teaching us discipline
Unless you are emigrating or qualify for early retirement due to ill health, you will not be able to touch the money in your RA prior to retirement. This will assist those who are less disciplined and often succumb to the temptation of withdrawing from their investments. On that note, should you deviate from your plan for the purpose of unexpected emergency funds, the benefit of Flexible RA’s allows contributions to be increased, decreased, or stopped at any time and will incur no penalties.
Cutting back on luxuries may not be much fun, but you will have yourself to thank if you are able to retire comfortably and, at the very least, maintain your current lifestyle.
For those who already have an RA in place, make sure that you contribute as much as possible before the financial year-end to reap the tax rewards associated with it.
For those who haven’t yet started saving towards your retirement, the best time to start is now!
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