What to Look Out For When Choosing a Retirement Annuity

Beginning your journey to save for retirement is the initial and most important first step to creating an investment portfolio. Unfortunately, many South Africans are not saving enough for retirement and it is commonly reported that, at present, only 6% of South-Africans can comfortably retire. Your retirement plan is one of your most important decisions.

As George Foreman said: “The problem isn’t about when I would like to retire, but at what level of income.”

A retirement annuity can be an excellent investment to have in your portfolio.

Annuities for retirement are a great way to fund retirement savings and provide a range of tax advantages. You can contribute a maximum of 27.5 percent of your earnings or salary that is tax deductible (capped at R350 000 p.a.) to retirement funds like a retirement annuity (RA) and enjoy tax savings on your taxable income. The growth in your retirement annuity’s investments (dividends and interest) is tax-free.

It also allows you to save for retirement by being disciplined. Annuities for retirement cannot be used before the age of 55. However there are some exceptions that permit access to the annuities earlier, e.g. in the case of permanent disability/emigration. You can make lump sum payments such as a debit order or even ad hoc contributions.

How do you take out the retirement fund you have in your account?

When you retire the first one-third of the total amount can be taken as a cash lump sum, unless the total value of the investment is less than R247 500, in which case it is deemed an amount of cash. The first R500 000 in an unintentional withdrawal in the event that you’ve never previously taken a cash withdrawal from a retirement account, is tax-free. The remainder of the amount of the fund must be used to buy an annuity in the future, which will give you a regular income subject to tax if appropriate.

Specific regulations apply to retirement annuities. The Pension Funds Act sets limits on the underlying investments that you are able to invest in. Regulation 28 prohibits investments in certain asset classes and is intended to stop investors from taking too high a risk in their retirement funds. There are various asset restrictions, including the maximum amount of exposure to 75% to equity, 40% in foreign equity (incl. Africa) 30 percent in foreign equity (excl. Africa), and 25% in property.

It is important to structure the allocation of your investment depending on your age and risk tolerance. A cautious approach to investing at an early age could be as harmful to your future as investing too aggressively towards retirement. The Easy Equities RA is an excellent choice for retirement annuities.

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