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We all hope to have enough money to pay for our monthly expenses (and some extra for fun stuff of course) once we hit retirement. No one wants to eat dog food 3 times a day. Except your dog of course. But I digress...
Retirement Annuities are one of a number of different products designed for the sole purpose of helping you achieve financial freedom in retirement.
A Retirement Annuity is basically a... bucket.
Yup an RA is like a bucket. And on it’s own it doesn’t do much – that is until you put some stuff into the bucket. It’s kind of like a bank account is just a number, but it becomes useful once you put some money inside of it.
So what can you put inside of an RA?
Well, to continue with the bucket analogy, you can put some investment blocks inside of your RA bucket.
These investment blocks are pretty much just like any other investments – Unit Trusts, Cash, Bonds etc.
To really dumb it down, it looks a little something like this - just a bucket with some blocks in it...
There is a maximum amount you are allowed to deduct from your taxable income with regards to retirement contributions (and note that this maximum applies across all retirement product contributions including your company’s pension or provident fund as well as retirement annuity contributions).
The current legislation states that you can deduct a maximum of 27.5% of your remuneration or taxable income (whichever is higher), and no more than R350,000.
This means that Steve would be able contribute a total of R110,000 per year (or R9167/month) to a pension fund, or RA, and deduct this from his taxable income for the tax year.
For example a RA provider may stipulate that you need to invest a minimum of R500/month or have a lumpsum of R10,000.
But nothing for nothing right?
So what is expected from you in return?
Well there are a few rules regarding the investments inside a Retirement Annuity. The legislation, or rules, around what is and isn't allowed for the investments inside of a RA is known as Regulation 28.
Your investments inside of an RA are also limited in terms of which types of asset classes you can invest in. The main types of asset classes are: Equities (companies), Property, Bonds, Cash and Commodities.
Currently Regulation 28 says that you cannot have more than:
So the three main components which make up the total fees you pay are:
If only there was a single figure which could represent the total annual cost that you are paying/will be paying for an RA? That way you could easily compare options, and figure out pretty quickly if you are being ripped off?
Well luckily there is!
The EAC (Effective Annual Cost) is pretty much a single figure which represents all the costs related to an RA. This makes it easy to compare RAs – e.g. RA x with an EAC for 1.6% is cheaper than RA y with an EAC of 2.5%.
So if you want to know the total cost of an RA, send your RA provider or financial adviser a mail and ask them to send you the EAC (or alternatively check your RA statements).
Bucket Fees – This fee can be called many things – admin/annual/account/platform fee. It is basically the fee the RA provider charges for your RA. Some providers are more expensive than others (but may provide additional features like access to particular Unit Trusts or ETFs), and there are even providers who charge a 0 bucket fee.
If you consider that most RA’s aim to achieve the same thing – to grow your money for retirement by investing in asset classes that are suited to your goals, time frames and risk appetite, then it make sense that a lower cost RA provider will leave you better off.
Investment Block Fees – The investment blocks inside of the RA bucket is what is actually growing your money (remember the RA account (bucket) only offers you the tax benefits and implements the regulation 28 rules). The investment blocks would have been selected by you or your financial adviser to give you exposure to different asset classes (cash, bonds, property, equities) according to your goals, time-frames, risk appetite personal preference etc.
The chosen asset allocation is often implemented through Unit Trusts or ETFs. Now if you consider that ETFs have fees of around half that of Unit Trusts, it means that on average, the average investor would achieve a better outcome (and yes, there is research to back this up) by choosing ETFs instead of Unit Trusts in their Retirement Annuity.
To me the best RA would be the one which gave me the most money at the end.
And because having enough money in retirement means that the Government doesn't have to look after you, many of these retirement products also come with some really nice tax breaks. Think of it as the Governments way of saying thank you for looking out for your future.
In this easy to follow guide, we are going to be looking at everything Retirement Annuity. We will start with the basics, and then cover some of the advanced topics too.
You are going to be a Retirement Annuity guru in no time!
What Is A Retirement Annuity (RA)?
A lot of people are under the impression that a Retirement Annuity (or RA) is a mystical and complicated beast which only the experts fully understand. The pros love to throw jargon around, and this means many people lose interest pretty quickly and believe they will never understand what an RA is or how it works.So let's dumb it right down, because a RA is actually pretty easy to understand.
A Retirement Annuity is basically a... bucket.
Wait, what?
Yup an RA is like a bucket. And on it’s own it doesn’t do much – that is until you put some stuff into the bucket. It’s kind of like a bank account is just a number, but it becomes useful once you put some money inside of it.
So what can you put inside of an RA?
Well, to continue with the bucket analogy, you can put some investment blocks inside of your RA bucket.
These investment blocks are pretty much just like any other investments – Unit Trusts, Cash, Bonds etc.
To really dumb it down, it looks a little something like this - just a bucket with some blocks in it...
Now the reason you want to put your investment blocks inside of an RA bucket, is because
once inside the RA bucket, these investment blocks enjoy some pretty awesome
tax breaks. You do not pay Income Tax, Capital Gains Tax or Dividends Withholding Tax inside of an RA.
And there is another great tax benefit to Retirement Annuities - you do not pay any tax on the money you contribute to a RA. The cool kids will tell you that contributions to a RA are "tax deductible" (more on that in the next section)
That is why many people use retirement annuities to save for their retirement – by not paying tax on your contributions or on your RA investments, it means you come out with more money when you
retire. More money is good.
So as you can see, the product is not maybe as complicated as many would have you believe?
Before moving on, let's quickly summarise what an RA is
RAs In a Nutshell
Retirement Annuity meaning - A RA (Retirement Annuity)
is basically a retirement savings account which holds some investments. The
investments inside of an RA can be in the form of Unit Trusts,
ETFs, or even Cash.
The reason you would want
to put your investments inside of an RA are due to the tax protection you get
by holding them inside of an RA and because the contributions you make to an RA
are tax deductible.
Retirement Annuities v Unit Trusts
Many people confuse Unit Trusts and Retirement Annuities, and that's probably because the two are often used together. However there are some pretty big differences between the two which is explained below.
Unit Trust |
Retirement Annuity |
| A unit trust is an investment product which you can buy. Depending on the type of Unit Trust, your money will be invested into one or more asset classes (Cash, Bonds, Equities, Property or Commodities). Unit Trusts spread your money (by investing in different asset classes, or countries, or in different companies) meaning that your investment is diversified |
A retirement annuity is just a bucket, which by itself doesn’t do anything. To turn a retirement annuity into something useful, you need to put something inside the bucket. The investments you put inside are then protected from Tax. One of the things you can put inside your Retirement Annuity bucket are Unit Trusts |
A good way to visualise the difference between an RA (Retirement Annuity)and a UT (Unit Trust) is to think of them as a chocolate (Yum!)
The RA is the chocolate wrapper (which protects the chocolate from dirt, keeps it fresh and stops the Government from eating some of it (Tax)). When people talk about Retirement Annuities, they mean the wrapper. But remember, a wrapper by itself is just a wrapper - we want the goodness inside!
A Unit Trust is an example of some of the deliciousness you can find inside of a RA wrapper. The other types of chocolates include ETFs or cash savings.
Tax Treatment Of Retirement Annuity Contributions
There is no tax payable on the investments inside of a
Retirement Annuity. And that’s a really great feature. But there is another
great tax benefit related to contributions you make to a Retirement Annuity.
Retirement contributions are what is called tax-deductible. In short that means that you do not pay tax on the money you invest into a Retirement Annuity.
In the view of SARS, you only earned (and therefore are only taxed on) the money you receive after you subtract (or deduct) the contributions you made towards your retirement annuity .
Tax treatment of your RA contributions looks a little something like this
For example, if you earned R250,000 for the year, but you contributed R1000 a month to a Retirement Annuity (which is R12,000 for the year) you will only be taxed on R238,000.
Because the contributions to an RA are tax deductible, it is like you earned less, and therefore you pay less tax. Less tax is good!
Maximum Tax Deduction
There is a maximum amount you are allowed to deduct from your taxable income with regards to retirement contributions (and note that this maximum applies across all retirement product contributions including your company’s pension or provident fund as well as retirement annuity contributions).
The current legislation states that you can deduct a maximum of 27.5% of your remuneration or taxable income (whichever is higher), and no more than R350,000.
This is best explained using some examples.
First let’s assume Daniel earns R400,000 a year and wants to work out the maximum he can contribute to retirement savings products.
Maximum Tax Deductible = Taxable Income x 27.5%
= R400,000 * 0.275
= R110,00
First let’s assume Daniel earns R400,000 a year and wants to work out the maximum he can contribute to retirement savings products.
Maximum Tax Deductible = Taxable Income x 27.5%
= R400,000 * 0.275
= R110,00
This means that Steve would be able contribute a total of R110,000 per year (or R9167/month) to a pension fund, or RA, and deduct this from his taxable income for the tax year.
Instead of being taxed on earnings of R400,000 for the year, he would only pay tax on R290,000 (R400,000 - R110,000).
As another example, meet the future you earning a cool R1.5Million a year. Let’s calculate the maximum tax deduction you would be allowed.
Maximum Tax Deductible = Taxable Income x 27.5%
= R1,500,000 * 0.275
= R412,500
In this scenario, the 27.5% of taxable income gives R412,500. But we must remember that there is a cap of R350,000 on the amount you are allowed to deduct.
As another example, meet the future you earning a cool R1.5Million a year. Let’s calculate the maximum tax deduction you would be allowed.
Maximum Tax Deductible = Taxable Income x 27.5%
= R1,500,000 * 0.275
= R412,500
In this scenario, the 27.5% of taxable income gives R412,500. But we must remember that there is a cap of R350,000 on the amount you are allowed to deduct.
Because of future you’s supersized earnings, the R350k cap is breached (lekker problem to have!) and so the maximum tax deductible contributions is limited to R350,000 worth of contributions per year (or R29,167/month) to a pension fund or RA.
Retirement Annuity - Minimum Investment Amount
Some RA providers require you to have either a minimum monthly amount, or a minimum lumpsum amount available to invest before they will let you open a RA with them.For example a RA provider may stipulate that you need to invest a minimum of R500/month or have a lumpsum of R10,000.
For some people this may seem pretty steep. But fear not!
There are some providers which have no minimums, and they will allow you invest even R10 at a time. For example there are no minimum requirements if you invest in the EasyEquities RA.
There are some providers which have no minimums, and they will allow you invest even R10 at a time. For example there are no minimum requirements if you invest in the EasyEquities RA.
Retirement Annuity Investment Rules
So, as we have seen from the above, SARS is pretty generous in allowing your contributions to be tax deductible, and also allowing the investments inside of an RA to grow tax free.But nothing for nothing right?
So what is expected from you in return?
Well there are a few rules regarding the investments inside a Retirement Annuity. The legislation, or rules, around what is and isn't allowed for the investments inside of a RA is known as Regulation 28.
Regulation 28 has quite a local is a lekker approach, and so the first rule it imposes is that no more than 25% of your investment is allowed to be outside of South Africa.
You are allowed an additional 5% outside of South Africa, provided it is being invested into Africa. This takes the maximum amount of the investment allocated outside of South Africa to 30%. So all in all at least 70% of your RA needs to be allocated to South Africa.
Your investments inside of an RA are also limited in terms of which types of asset classes you can invest in. The main types of asset classes are: Equities (companies), Property, Bonds, Cash and Commodities.
Currently Regulation 28 says that you cannot have more than:
- 75% invested into equities
- 25% invested into property
Retirement Annuity Fees
It is vitally important to keep an eye on the fees you are paying/are going to be paying on a RA.Paying too much for a Retirement Annuity can undo all the hard work you have put in and the sacrifices you have made in order to afford your RA contributions.
Bear in mind that most RAs are targeted at growing a certain percentage above inflation. That percentage above inflation is what is known as your “real return”. The real return is the part that makes your RA grow, and it is the part which makes you wealthier.
Bear in mind that most RAs are targeted at growing a certain percentage above inflation. That percentage above inflation is what is known as your “real return”. The real return is the part that makes your RA grow, and it is the part which makes you wealthier.
If you are not beating inflation, then you are not going anywhere (or you may even be going backwards!)
Now if, for example, your RA generates a return of 3% above inflation, but you are paying 3% in fees, then you have not gone anywhere. You have not generated any wealth.
Now if, for example, your RA generates a return of 3% above inflation, but you are paying 3% in fees, then you have not gone anywhere. You have not generated any wealth.
Paying a reasonable fee for your RA is super important.
What Makes Up The Total Cost Of A RA?
When it comes to assessing the total fee that you pay for an RA, you need to consider each component of the RA you have signed up for/are going to sign up for.
To understand the various components it is probably best to revisit the bucket analogy for RA’s (from the beginning of the article.)
Remember an RA is like a bucket with some investment blocks in it.
When you consider the total fees of an RA, keep in mind that there is usually an annual fee for the “Bucket”, and then there is also a fee related to each "Investment Block" in the bucket.
Remember an RA is like a bucket with some investment blocks in it.
When you consider the total fees of an RA, keep in mind that there is usually an annual fee for the “Bucket”, and then there is also a fee related to each "Investment Block" in the bucket.
And if you signed up for your RA through a financial adviser, you can be sure that they are taking their cut every month as well.
The total fees look a little something like this:
The total fees look a little something like this:
- The RA platform/admin/annual/account fee(s) (a.k.a. Bucket Fees)
- The underlying investment fees (a.k.a. Investment Block Fees)
- The financial adviser fees (if you used one to sign up for the RA)
How to find out your total fee
Figuring out exactly how much you are paying for your RA can be tricky business. Different providers call their fees different names, and sometimes you don’t even know what the underlying investment blocks are, never mind what they cost.If only there was a single figure which could represent the total annual cost that you are paying/will be paying for an RA? That way you could easily compare options, and figure out pretty quickly if you are being ripped off?
Well luckily there is!
The EAC (Effective Annual Cost) is pretty much a single figure which represents all the costs related to an RA. This makes it easy to compare RAs – e.g. RA x with an EAC for 1.6% is cheaper than RA y with an EAC of 2.5%.
So if you want to know the total cost of an RA, send your RA provider or financial adviser a mail and ask them to send you the EAC (or alternatively check your RA statements).
Tips For Reducing Retirement Annuity Fees
If you consider that most RA’s aim to achieve the same thing – to grow your money for retirement by investing in asset classes that are suited to your goals, time frames and risk appetite, then it make sense that a lower cost RA provider will leave you better off.
Investment Block Fees – The investment blocks inside of the RA bucket is what is actually growing your money (remember the RA account (bucket) only offers you the tax benefits and implements the regulation 28 rules). The investment blocks would have been selected by you or your financial adviser to give you exposure to different asset classes (cash, bonds, property, equities) according to your goals, time-frames, risk appetite personal preference etc.
The chosen asset allocation is often implemented through Unit Trusts or ETFs. Now if you consider that ETFs have fees of around half that of Unit Trusts, it means that on average, the average investor would achieve a better outcome (and yes, there is research to back this up) by choosing ETFs instead of Unit Trusts in their Retirement Annuity.
Financial adviser fee – There are generally two types of financial advisers, those that charge a percentage based commission and those that charge a flat fee/hourly rate. A financial adviser who charges a percentage based commission will take a cut for every month that you have the RA. In the beginning this can be pretty cost effective, but as your investment grows larger, the fee that the financial adviser charges also grows and can easily run into tens of thousands of rands a year for larger investments.
For large investment balances it can be more cost effective to pay an adviser a fixed fee or an hourly rate instead of a percentage based fee
For large investment balances it can be more cost effective to pay an adviser a fixed fee or an hourly rate instead of a percentage based fee
And of course, many of the RA providers allow you to sign up directly. If you know your risk profile it is possible to skip a financial adviser and sign up directly (but note this option is best suited for more experienced investors who have some investment knowledge.)
The Best Retirement Annuity
Naturally, when signing up for a Retirement Annuity, you want to choose the best one. But before we try pick the best RA, maybe we should define what exactly we mean by “best”.To me the best RA would be the one which gave me the most money at the end.
Not so?
Maximising your investment is the whole point of trying to make sure you pick the right RA.
So the next question is - What are the factors which influence the final investment amount?
In my mind there are two (ignoring the number of years invested and the contribution amount because that would be the same no matter which RA you went with).
So the next question is - What are the factors which influence the final investment amount?
In my mind there are two (ignoring the number of years invested and the contribution amount because that would be the same no matter which RA you went with).
Therefore the two factors which will affect the final investment outcome of your RA are:
We already looked at some tips for getting the fees of your RA down. So why would you want to do this?
Well quite simply, the less of your investment you pay away in fees, the more of your investment is left in your account to grow and compound.
- Fees
- Investment performance
Let's unpack these.
Fees
Yes, I know, we are back at fees again. And maybe you starting to appreciate how important they are (and if not yet, then definitely soon - keep reading)We already looked at some tips for getting the fees of your RA down. So why would you want to do this?
Well quite simply, the less of your investment you pay away in fees, the more of your investment is left in your account to grow and compound.
It might not seem like fees are that big a deal, but have a look at this picture courtesy of 10x
There is no escaping the fact that different investment blocks in your RA bucket will perform differently. Some will give spectacular returns, and some will be epic disasters.
No problem though – all you need to do is make sure that you fill your RA bucket with only the best performing blocks. Easy peasy.
If only.
The big problem is that there is no way of telling which blocks will perform the best.
Research confirms that past performance is a pretty useless indicator of future performance. however what research did find is that there is only one factor which is slightly correlated to future performance.
Note that some providers fees change depending on your investment size, and so the total cost can vary according (yes size usually matters!)
If the total value of your retirement annuity is less than R247,500, then you are allowed to take the entire value of cash.
Tax payable = 18% of R100,000
= 0.18 x 100,000
= R18,000
So they will pay tax of R18,000 and end up with R582,000
Next consider someone with a Retirement Annuity value of R3 Million. At age 55 they will be allowed to take up to 1/3 of the value as cash (1 Million). But say that they elect to only take R800,000 as cash.
The third row of the table applies, and they will pay tax of R36,000 plus 27% of the amount above R700,000.
Tax payable = 36,000 + 0.27 x R100,000
= 36,000 + 27,000
= 63,000
So on the R800,000 lumpsum they will pay a total of R63,000 in tax, and end up with R737,000
Note - you are allowed to take a maximum of 1/3 of the value of the RA as cash, but you are not obligated to do so. In other words you are allowed to take less than 1/3 as cash, or even no cash at all.
Well, you need to use that money to buy yourself an Annuity Product. This annuity product is designed to pay you a monthly income.
In short there are two types of annuity products you can buy with the remaining 2/3 of your Retirement Annuity value. You are allowed to buy either one or the other type, or even a combination of the two.
In other words Pension Funds and Retirement Annuities are very similar, and everything in this article around the tax treatment and rules of investing in an RA also applies to pension funds. A pension fund can be accessed before age 55 (but there are tax penalties if you do this) whereas generally speaking a RA cannot.
Another big difference between a pension fund differs and a RA is that you can only join a pension fund through the company that employs you.
The Income Act states that if a South African citizen has formally emigrated from South Africa (that is to say you have physically emigrated) and the emigration has been recognised by SARS, then they will be able to access the funds in their RA, subject to tax.
In short, for SARS to recognise your emigration, you need to financially emigrate.
In order allow your RA provider to pay out the value of your RA, they will need to submit a request to SARS so they can obtain a tax directive for the full value to be paid out in cash due to financial emigration. To allow them to get the tax directive, the RA provider will require you to submit the following:
The table below (available on the SARS website) specifies the tax payable upon RA withdrawal for the 2021 Tax Year (Note that this table is usually updated in the annual budget, and so it is subject to change going forward)
As you can see the first R25,000 of the RA pay-out will not be taxed. Any amounts above R25,000 start attracting tax at 18%.
For example, if someone cashes out a RA worth R500,00, then the second row of the table applies. They will be charged 18% of the value above R25,000 (which is 18% of R475,000).
Tax payable = 0.18 x R475,000
= R85,500
This means they will end up with R500,000 – 85,500 = R414,500
As another example, if someone has an RA worth R750,000 which they cash out after emigrating, then the third row of the table applies.
They will be charged tax of R114,300 plus 27% of the amount above R660,000 (i.e. 27% of R90,000)
Tax payable = 114,300 + 0.27 x 90,000
= 114,300 + 24,300
= 138,600
This means they will end up with R750,000 – R138,600 = R611,400
It is important to note that this table applies to RA pay-outs, but also other retirement product payouts (e.g. pension funds and preservation funds). That means you need to combine the values of all the retirement product pay-outs you receive before applying the table above.
It unfortunately also means that you don’t get the first R25,000 tax free per retirement product, but rather across all retirement product pay-outs.
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Till next time, Stay Stealthy!
- ~ - ~
Fees continuously nibble away
at your investment, resulting in you having significantly less than what you
could have had (in the 10x example above, a whole R1.9 Million less if you pay a 3% fee instead of a 1% fee!)
It may seem like some effort
to shop around and compare RA options, but if that leaves you a few million
better off it is well worth it! Surely?
Okay, so that covers the fee
aspect of the RA outcome - less if more!. Let's check out the other important factor.
Investment Performance
The other important factor which determines how much you end up with in your RA is investment performance.There is no escaping the fact that different investment blocks in your RA bucket will perform differently. Some will give spectacular returns, and some will be epic disasters.
No problem though – all you need to do is make sure that you fill your RA bucket with only the best performing blocks. Easy peasy.
If only.
The big problem is that there is no way of telling which blocks will perform the best.
Research confirms that past performance is a pretty useless indicator of future performance. however what research did find is that there is only one factor which is slightly correlated to future performance.
Any idea what it is?
It starts with an F...
Yes that's right, we are back to fees!
Investments with lower fees tend to outperform those which charge higher fees – irrelevant of past performance.
So the two factors which affect the outcome of your RA investment (fees and investment performance) can actually be reduced to only one factor – Fees
In other words, one way of selecting the best RA would be to just select the cheapest RA.
The
This really awesome online tool ranks the cheapest RA providers according to the fees that they charge. Currently it lists these 5 providers as the cheapest in South Africa* (not necessarily in order)
Investments with lower fees tend to outperform those which charge higher fees – irrelevant of past performance.
So the two factors which affect the outcome of your RA investment (fees and investment performance) can actually be reduced to only one factor – Fees
In other words, one way of selecting the best RA would be to just select the cheapest RA.
The Best Cheapest RAs In South Africa
This really awesome online tool ranks the cheapest RA providers according to the fees that they charge. Currently it lists these 5 providers as the cheapest in South Africa* (not necessarily in order) - Sygnia
- Nedgroup
- Easy Equities
- 10x
- Outvest
Note that some providers fees change depending on your investment size, and so the total cost can vary according (yes size usually matters!)
If you want to keep your RA fees low, you will do really well to start looking into the above providers.
This means that when you invest in a retirement annuity, you are effectively locking your money away until 55.
Accessing Your Retirement Annuity
Generally speaking, you can only access the funds inside of a retirement annuity once you are 55 years old (there are some exceptions – like emigration (more on that later), using the funds for a divorce settlement, if you suffer a disability, or if the value in your RA is less than R7,000).This means that when you invest in a retirement annuity, you are effectively locking your money away until 55.
Then, once you are 55 years old, there are some rules around what you can and cannot do with the funds in your Retirement Annuity.
Retirement Annuity Withdrawal Rules (2020)
Once you are 55 years old you are allowed to “retire” from
your Retirement Annuity. There are however some rules around the amount of cash
you are allowed to take, and what the remaining money needs to be used for.
In short the rules are shown in the picture below. A more detailed explanation follows after.
You Can Take Up To 1/3 Of The Value Of Your RA As Cash
If you have more than R247,500, then you are only allowed to take up 1/3 of the value as cash.
For example, if your Retirement Annuity is worth R1.2 Million at age 55, you will be able to take up to R400,000 as cash.
Note that the cash lumpsum that you take is subject to tax according to the rates specified in the table below (These values are for the 2020/2021 tax year, are available on the SARS website, and are subject to change going forward.)
For example, if your Retirement Annuity is worth R1.2 Million at age 55, you will be able to take up to R400,000 as cash.
Note that the cash lumpsum that you take is subject to tax according to the rates specified in the table below (These values are for the 2020/2021 tax year, are available on the SARS website, and are subject to change going forward.)
|
Taxable income (R) |
Rate of tax (R) |
|
1 – 500 000 |
0% of taxable income |
|
500 001 - 700 000 |
18% of taxable income above 500 000 |
|
700 001 – 1 050 000 |
36 000 + 27% of taxable income above 700 000 |
|
1 050 001 and above |
130 500 + 36% of taxable income above 1 050 000 |
As an example, consider someone with a RA value of R1.8 Million.
At age 55, they are allowed to take up to 1/3 of this value as cash (R600,000). If they decide to take the entire 1/3 (R600,000) as cash, then they will be taxed according to the second row of the table above, and they will pay 18% of the amount above R500,000
Tax payable = 18% of R100,000
= 0.18 x 100,000
= R18,000
So they will pay tax of R18,000 and end up with R582,000
Next consider someone with a Retirement Annuity value of R3 Million. At age 55 they will be allowed to take up to 1/3 of the value as cash (1 Million). But say that they elect to only take R800,000 as cash.
The third row of the table applies, and they will pay tax of R36,000 plus 27% of the amount above R700,000.
Tax payable = 36,000 + 0.27 x R100,000
= 36,000 + 27,000
= 63,000
So on the R800,000 lumpsum they will pay a total of R63,000 in tax, and end up with R737,000
Note - you are allowed to take a maximum of 1/3 of the value of the RA as cash, but you are not obligated to do so. In other words you are allowed to take less than 1/3 as cash, or even no cash at all.
Possible RA Cash Hack
If the value of your RA is less than R247,500, then you are allowed to take 100% of the value of the Retirement Annuity as cash, and you do not need to buy any living or guaranteed annuity products with the proceeds. But there is a caveat to this law which allows for a possible hack.
You see the R247,500 threshold applies per RA registered fund, not per individual policy or contract.
In practice, this means that if for example you had 3 different Retirement Annuity policies, all the with same provider, and each policy was worth less than R247,500, but together they exceed R247,500, then you would not be able to take 100% as cash.
But....
Say for example, you had two different Retirement Annuity policies with two different providers, and each policy was worth R220,000. In this case you would be able to take R220,000 out of each RA as cash, and end up with R440,000 cash.
Of course multiple RA policies require additional admin, but this is something to keep in mind if your RA is not expected to be very large, and you would like full access to cash once you retire from the RA.
The Remaining 2/3 Must Be Used To Buy An Annuity Product
So if you are only allowed to take a maximum of 1/3 as cash when you retire from your Retirement Annuity, what happens to the other 2/3?Well, you need to use that money to buy yourself an Annuity Product. This annuity product is designed to pay you a monthly income.
In short there are two types of annuity products you can buy with the remaining 2/3 of your Retirement Annuity value. You are allowed to buy either one or the other type, or even a combination of the two.
- A guaranteed annuity – This is an insurance product which will pay you a guaranteed monthly income until you die. Depending on the options you select, you can have the monthly amount increase according to inflation each year, or remain at the same level (in which case your income will buy you less and less as the effects of inflation slowly reduces the purchasing power of your monthly income.) You can also select different options relating to whether the income should go to your surviving spouse once you die. With this option you will not be able to leave anything to your beneficiaries.
- A living annuity – This is an investment product which you can draw a percentage from each year in order to cover your living expenses. Unlike a guaranteed annuity which pays you every month until you die, if you draw too much out of a living annuity you could run out of money. If you die and there is still money left in your living annuity, you can leave it to your beneficiaries.
Note that the income that you take from either a Guaranteed or a Living Annuity is subject to income tax.
Retirement Annuity vs Pension Fund
A Pension Fund and a Retirement Annuity are both products which can be used for saving for your retirement. They also enjoy many of the same tax benefits and are subject to the same Regulation 28 rules which govern all retirement savings products.In other words Pension Funds and Retirement Annuities are very similar, and everything in this article around the tax treatment and rules of investing in an RA also applies to pension funds. A pension fund can be accessed before age 55 (but there are tax penalties if you do this) whereas generally speaking a RA cannot.
Another big difference between a pension fund differs and a RA is that you can only join a pension fund through the company that employs you.
If you become employed by a company that offers a pension fund, and you are eligible to join, then in most cases you are obliged to join the fund and it will be a condition of your employment. Your contributions to the fund will be automatically deducted and reflected on your payslip.
Because your pension fund is tied to your employer, it means that if you resign, are fired, or you are retrenched, you can no longer remain a member of the fund. In this case there are a few options you can consider for the money in your pension fund. You can:
Because your pension fund is tied to your employer, it means that if you resign, are fired, or you are retrenched, you can no longer remain a member of the fund. In this case there are a few options you can consider for the money in your pension fund. You can:
- Preserve your money in a Preservation Fund,
- You can take a partial or full cash withdrawal (which will be subject to tax and IS NOT recommended if you can avoid it.)
- If you are moving jobs, and your new employer’s pension fund is with the same provider as your previous employer, then there may also be an option to transfer your pension fund to the new employer.
If you are a member of your employer’s pension fund, you will still be able to open an RA in your private capacity. Just remember that the retirement contribution tax deduction applies across all retirement products.
The similarities and differences between Pensions Funds and Retirement Annuities are summarised below.
Emigration And Retirement Annuities
Legislation states that the funds in a Retirement Annuity cannot be accessed until the age of 55. However, one of the exceptions to this rule is if someone has emigrated from South Africa.The Income Act states that if a South African citizen has formally emigrated from South Africa (that is to say you have physically emigrated) and the emigration has been recognised by SARS, then they will be able to access the funds in their RA, subject to tax.
In short, for SARS to recognise your emigration, you need to financially emigrate.
In order allow your RA provider to pay out the value of your RA, they will need to submit a request to SARS so they can obtain a tax directive for the full value to be paid out in cash due to financial emigration. To allow them to get the tax directive, the RA provider will require you to submit the following:
- Attested MP336(b)
- ETCC
- SARB approval
- Tax residency certificate (to show the country where you are currently residing)
- Latest SA bank statement (to show that you have an open an active SA bank account.)
The reason for this is that the RA pay-out cannot be sent directly to a foreign bank account. The funds need to be paid into a local South African bank account which is in the name of the RA policy holder (so you also will not be able to use Aunty Sue’s bank account and then ask her to send you the money).
In case you were wondering, it is possible to hold a South African bank account even if you have financially emigrated. The bank accounts status will need to be updated to a non-resident bank account.
Once the money is in your non-resident South African bank account, you will then be able to transfer it to your bank account in your new country.
In case you were wondering, it is possible to hold a South African bank account even if you have financially emigrated. The bank accounts status will need to be updated to a non-resident bank account.
Once the money is in your non-resident South African bank account, you will then be able to transfer it to your bank account in your new country.
Tax On Retirement Annuity Pay-outs Due To Emigration
It is important to note that when making a full withdrawal from your RA due to emigration, the pay-out is subject to Tax. The amount of tax charged is dependent on the size of the withdrawal.The table below (available on the SARS website) specifies the tax payable upon RA withdrawal for the 2021 Tax Year (Note that this table is usually updated in the annual budget, and so it is subject to change going forward)
|
Taxable income (R) |
Rate of tax (R) |
|
1 – 25 000 |
0% |
|
25 001 - 660 000 |
18% of taxable income above 25 000 |
|
660 001 - 990 000 |
114 300 + 27% of taxable income above 660 000 |
|
990 001 and above |
203 400 + 36% of taxable income above 990 000 |
As you can see the first R25,000 of the RA pay-out will not be taxed. Any amounts above R25,000 start attracting tax at 18%.
For example, if someone cashes out a RA worth R500,00, then the second row of the table applies. They will be charged 18% of the value above R25,000 (which is 18% of R475,000).
Tax payable = 0.18 x R475,000
= R85,500
This means they will end up with R500,000 – 85,500 = R414,500
As another example, if someone has an RA worth R750,000 which they cash out after emigrating, then the third row of the table applies.
They will be charged tax of R114,300 plus 27% of the amount above R660,000 (i.e. 27% of R90,000)
Tax payable = 114,300 + 0.27 x 90,000
= 114,300 + 24,300
= 138,600
This means they will end up with R750,000 – R138,600 = R611,400
It is important to note that this table applies to RA pay-outs, but also other retirement product payouts (e.g. pension funds and preservation funds). That means you need to combine the values of all the retirement product pay-outs you receive before applying the table above.
It unfortunately also means that you don’t get the first R25,000 tax free per retirement product, but rather across all retirement product pay-outs.
Retirement Annuities And Emigration Going Forward
The future of accessing your retirement annuity after emigration is becoming cloudier.
There have been moves aiming to update the laws around accessing your retirement annuity after you emigrate.
One of the proposals is to only allow access to retirement funds after a person has ceased to be a South African resident and that person has remained non-tax resident for at least three consecutive years or longer. This means there could be a minimum 3 year delay before you will be able to gain access to the fund in your RA, even if you have emigrated.
Should You Invest In A Retirement Annuity?
There are some really great tax benefits that come with using a RA to invest for your retirement.
However, putting your money into a Retirement Annuity means you will be locking it away until you are 55 (although this might be a good thing in terms of forcing discipline if you think you might find yourself dipping your hands into the cookie jar from time to time).
And keep in mind that there are rules around keeping the majority of your investments South African based, and your asset allocation needs to fall within Regulation 28 guidelines. This means that you may not be able to implement the asset allocation best suited to you and your goals inside of an RA.
There is also some uncertainty about the future with regards to Government imposing additional rules about where RA (and other pension fund) money needs to be invested. Prescribed assets is a risk which you should factor in.
And don't forget about the limitations imposed on you when you are over 55 and want to access your RA. Only one third can be taken as cash (subject to tax), and the remaining two thirds must be used to buy a Guaranteed and/or Living Annuity to generate an income for you. This income is subject to income tax. So while there are some tax benefits on RA contributions and growth, there is no Tax protection once you start accessing the money.
Something else that is worth mentioning, is that if you belong to your employer's Pension Fund scheme, then you are already enjoying the same tax benefits on those contributions as you would in a Retirement Annuity. Pension Fund money is subject to the same Regulation 28 rules that apply to Retirement Annuities.
So if you have additional money that you would like to contribute toward your retirement, you can consider upping your Pension Fund contribution (speak to your HR to find out how). Alternatively it might not be a bad idea to diversify away from Regulation 28 funds, while still enjoying some tax benefits, by investing in a TFSA instead of a Retirement Annuity.
In closing, a Retirement Annuity can be a great tool to use when saving for your retirement. But as always there are pros and cons, and your personal situation, risk appetite, goals, time frame and tax situation all play a role in the decision. If you are not sure, then speak to a financial adviser.
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Till next time, Stay Stealthy!
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