Take advantage of tax benefits of Retirement Annuities before 28 February

Now is the time to chat to your financial planner about making a lump sum investment into your Retirement Annuity, with the end of the tax year (28 February 2019) fast approaching.

We are regularly reminded about the tax efficiency of Retirement Annuities. You may not be fully aware, however, of the benefits and restrictions of this kind of investment vehicle.

Why choose an RA?

Your contributions to a Retirement Annuity are tax deductible, subject to certain limits. The deduction is limited to 27.5% of your taxable income or remuneration, subject to an overall maximum cap of R350,000 per year. There is no tax on the investment growth within your Retirement Annuity.

When you retire from your Retirement Annuity, there are additional tax benefits. Although you can only take up to one-third of the fund in Cash, this is taxed according to the Retirement and Death tax tables where the first R500,000 is tax free. Amounts in excess of R500,001 and less than R700,000 are taxed at 18%; amounts in excess of R700,001 and less than R1,050,000 are taxed at 27%; and any amounts over R1,050,001 are taxed at a flat rate of 36%. These tax rates are sometimes a lot lower that your normal marginal rate.

On death, your retirement annuity is paid out to your dependents, without going via your estate. This saves on Executor’s fees, and ensures that your dependents receive the proceeds without having to wait for your estate to be wound up.

Your dependents can either draw an annuity (pension) from your Retirement Annuity, or cash in your fund, or a combination of an annuity and cash. If your dependents take a cash amount from your Retirement Annuity, tax will be withheld from this payment. If your beneficiaries choose to receive an annuity, they will pay income tax on the income they receive from the annuity.

Generally, the proceeds of your Retirement Annuity are not subject to estate duty. There is an exception where, if you have made contributions towards your Retirement Annuity that are not tax-deductible, this amount is subject to estate duty in your estate.

Should you go insolvent, your Retirement Annuity is generally protected against creditors.

RA restrictions

The disadvantage of a Retirement Annuity is that it cannot be accessed before the age of 55. The exception is if you emigrate officially, you can take your Retirement Annuity savings before this age.

At retirement age 55, or later if you choose, you can draw up to one-third of the fund in cash, and the balance of two-thirds must be used to buy yourself an annuity (pension). If your full fund value is less than R247,500 you can take the full amount in cash.

Any contributions in excess of 27.5% of your taxable income, or R350,000 per year, are not tax-deductible and will be carried forward to the following tax year. If they are still not deductible then, they will eventually be tax-free on retirement, thus increasing the tax-free lump sum you can take. Any non-deductible amounts, however, will be included in your estate at death.

Your Retirement Annuity is not protected on divorce. Your ex-spouse can claim against your retirement fund in terms of section 7 of the Divorce Act. There are also certain restrictions as to how your Retirement Annuity may be invested, in terms of Regulation 28 of the Pension Funds Act.

Section 37 of the Pension Funds Act removes your freedom of testation regarding who your monies may be paid out to on death. It obliges the trustees of the Retirement Annuity to pay the death benefits to your “dependents” as defined in the Act. Trustees may overrule your beneficiary nomination, and may pay this amount to your dependents as they deem equitable. You have no control over how the assets in the fund will be distributed on your death.

A Retirement Annuity is a very efficient tax and estate duty vehicle. Be aware, though, of the limits on the tax-deductibility of contributions, and on your access to your savings. In addition, on your death you cannot control the distribution of the funds.

A Retirement Annuity is one of the few ways that you can make investments into a unit trust that are tax deductible, but you should invest knowing all the issues.

If you are considering making a lump sum investment into your Retirement Annuity, we suggest that you consult with your financial planner.

Pat Blamire is a CFP® and RetiremeantTM Specialist at Chartered Wealth Solutions. Pat has Advanced Post Graduate Diplomas in Financial Planning, specialising in investments and in Estate Planning. She is a member of STEP (Society of Trust and Estate Practitioners) and holds their TEP designation.

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