Q
It ' s the end of the tax year and I get to top up my Retirement Annuity and get the tax deduction, but what are the other benefits and what are my options when I retire?
A
This time of year is the silly tax season. The new budget gets announced, clients are scrambling to top up their RA ' S and Tax Free Savings accounts and it ' s all done in the shortest month of the year. The meaning of the word February is to purify or expiate. In ancient Roman times it was the month of purification where great festivities were held to refocus on righteous living. From a financial point of view we see it as a month to refocus on your financial living and get your financial plans back on track.
The Retirement Annuity benefits allow you to deduct your contributions against your taxable income. What this effectively means is that SARS will fund a portion of your retirement benefits. You can now contribute up to 27.5 %( used to be 15 %) of your earnings towards your RA up to a maximum deductible amount of R350 000. Depending on your tax bracket you could save up to 41 % in tax for every rand you put towards retirement. I realise that we can ' t all afford to invest 27.5 % of our salary and it may mean that your take home pay may be less, but remember that your contributions to retirement is your money and at least you are not paying it away to tax. It will also ensure that you are in a better position at retirement.
Other benefits include
= No tax on the growth within the RA. No CGT, no tax on interest and dividends and therefore better overall growth if comparing with the same portfolio in a discretionary investment.
= Protection from creditors.
= Protection from yourself in that you can ' t cede the portfolio for security and you cannot access the funds before age 55.
= Protection for beneficiaries and dependents.
26 sensible finance Mar17
Once you have reached retirement and want to retire from your RA you can access 1 / 3rd of your funds as a lump sum with the first R500 000 being tax free. If you are wise you will re-invest these funds. The remaining funds within the RA must be transferred to a pension type structure such as a Living Annuity. The Living Annuity has similar characteristics to the RA in that there is no tax within the portfolio and you can nominate a beneficiary. It allows you the flexibility to invest the funds as you see fit. The portfolio must, however, provide an income, which you can select between 2.5 % and 17.5 % p. a. One needs to be careful not to draw too high an income as you can start eroding capital. The normal withdrawal rates that are sustainable are between 4 % and 6 % which allows for some capital and income growth over time. The income you draw is taxable.
The Living Annuity is a very transparent portfolio and you can see your value and this can be left to your heirs on death. What is great, is that you get to control your pension portfolio with the assistance of good financial advice and you can tailor make the portfolio to suit your needs and risk profile. The portfolio options have advanced to the stage that you can even hold direct shares within your pension and live off the dividends from these shares. An example of this is at the moment you can get growing rental yields from property stocks of around 9 % p. a. and some income funds are producing a yield of 9 % as well with lots of protection in the portfolio. Provided your withdrawal rate is lower this allows you to cover your income requirements.
On death your beneficiaries have the option to take over the portfolio as it is or have the funds paid out as a lump sum less tax.
Despite some of the restrictions regarding access to the capital the retirement portfolios allow the investor a lot of flexibility to manage the portfolio to their particular needs. In an environment where more and more employers are opting not to
continued on page 28