Question:
What are the benefits for topping up a retirement annuity?
Answer:
Sarah,
Topping up your retirement annuity makes sense for a number of reasons:
Firstly, you increase the absolute amount of your savings; as you may only access your retirement annuity savings at retirement (earliest age 55), this means you should receive a higher income in retirement (you have to convert two-thirds of your retirement annuity into an annuity at retirement). Remember, you do not just "put away" the top-up payment, but also the return earned on this money until you retire. In other words, with a top-up payment you have more money saved and more money working on your behalf.
Secondly, top-up payments allow you to reach your maximum allowable tax deduction for your retirement annuity. Presently, you may deduct 15% of your non-pensionable income (pensionable income is the income used by your employer to calculate contributions to the company’s pension or provident fund).
This tax deduction is important. If you cannot claim a tax deduction for your top-up payment, this will be added to your untaxed cash lump sum portion at retirement (ie it will not be taxed). The investment income in your RA is not taxed, but you do pay tax on cash lump sums above R315 000 (per the cash lump sum tax table at the time), and on your monthly annuity income (per the personal income tax tables at the time). From a tax perspective, you then need to consider whether you would be better off investing within an RA structure, or without. This depends in part on how you will invest this money (interest income above R22 500 is taxed at your marginal tax rate, dividends and capital gains effectively at 10%).
Thirdly, any money invested in a retirement annuity fund is protected should the member become insolvent.
Fourthly, upon death, the retirement annuity investment is not subject to estate duty, provided no lump sum is taken.
