A retirement annuity (RA) is a retirement fund in terms of the Pension Funds Act. It is a tax-effective investment vehicle designed for individual investors (as opposed to employees who contribute to a workplace retirement fund). A retirement annuity is ideal for people who:
- are self-employed;
- don’t have access to a work-place pension or provident fund through their employer;
- want to supplement their pension or provident fund savings;
- earn significant amounts of non-pensionable income (e.g. interest and rental income);
Pensionable income is the income used by your employer to calculate contributions to the company pension or provident fund. This will likely include your full basic salary but may exclude discretionary payments such as bonuses/incentives. It will also exclude any non-work-related income, such as interest or rental income.
Tax benefits: Since 1 March 2016, RAs qualify for the same tax incentives as pension and provident funds. You may deduct contributions to an RA fund up to 27.5% of taxable income or gross remuneration (whichever is the higher) for tax. The 27.5% limit applies to the aggregate of contributions to all funds (pension, provident and RA). The overall tax-deductible limit is R350,000 per annum. Contributions over the annual rand limits may be rolled over to future years, but will be subject to the limits applicable in those years.
You can join as many RAs as you wish, but the tax relief is determined in aggregate, not in respect of each individual fund. Your employer may contribute to an RA fund on your behalf. They can deduct unlimited contributions but those contributions will be taxed as a fringe benefit in your hands.
Access: You can only retire from your RA from age 55 onwards (the one exception is early retirement due to ill-health). You can however withdraw before age 55, either on emigration, if you have gone through the formal financial emigration process with SARB and SARS, or if the paid-up RA value is less than R7,000. Withdrawals are subject to withdrawal lump sum tax (see table below).
You can also make your RA ‘paid-up’. This means you no longer pay monthly contributions; however you will stay invested until you retire (from age 55 onward).
At retirement, you may take up to one third as a cash lump sum (subject to retirement lump sum tax (see table below); at least two-thirds must go towards a compulsory annuity. Compulsory annuitisation applies to fund balances above R247,500. If you own multiple RAs in one RA fund, then the annuitisation requirement considers the aggregate value of your RAs. If you have multiple RAs in different RA funds, then the annuitisation requirement is applied to each RA individually.
There is no maximum age at which you need to stop contributing to an RA, or at which you need to access your RA.
On death, your benefit will be allocated by the Fund Trustees according to the rules set out in the Pension Funds Act. The Trustees must ensure that all your financial dependents are considered. You can assist them by listing all such dependents in your beneficiary nomination form. If you do not leave any financial dependents, the Trustees will allocate the benefit according to your beneficiary nomination form. If you do not have any financial dependents and you fail to complete this form, the money will fall into your estate and will be distributed according to your will. Any lump sum payment on your death will be taxed as a retirement benefit as though it had been received by you prior to your passing.
Fig 1: Retirement and withdrawal lump sum tax tables
| At Retirement | Tax Rate | Withdrawal | Tax Rate |
|---|---|---|---|
| R0 - R 500,000 | 0% | R0 - R25,500 | 0% |
| R500 000 - R700 000 | 18% | R25 001 - R660 000 | 18% |
| R700 001 - R1 050 00 | 27% | R660 000 - R990 000 | 27% |
| +R1 050 000 | 36% | +R990 000 | 36 |
Source: SARS
Transfers: You can transfer your RA tax free from one RA provider to another but you cannot transfer your RA to another type of retirement fund. The cost or penalty for transferring or making your RA paid-up depends on your service provider.
Types of RAs: There are two broad types of RAs. The traditional policy-based RA is underwritten by the big life assurance companies whereas the “new generation” unit-trust based RA is offered by the asset management industry.
Policy-based RAs are inflexible. You enter into a long-term contract and incur obligations for decades into the future, specifying how much you must save and for how long. Breaking these terms accelerates the recovery of upfront costs (mainly commissions) loaded against your policy. These then appears as the notorious variation or early termination charges everyone complains about. They are capped at a maximium of 30% of your RA (if the policy was bought before 2006) or 15% (if the policy was bought after 2006).
If you are considering transferring your RA to another service provider, be aware that surrender penalties are costs you will be charged irrespective of whether you transfer or not (ie either as one deduction on transfer or as monthly deductions over the term of your investment).
Traditional RAs are usually sold through a broker. Even if you come direct, you may be “allocated” a financial adviser. Their commission depends on the terms you have agreed to: the higher your contribution, your escalation rate, the fund fees and the investment term, the bigger your broker’s commission. This incentive may tempt intermediaries to maximise their commission rather than your return. The recovery of this cost can reduce your investment return by between 0,5% and 0,75% pa. This may not seem like a lot, but over a 30-year savings period, it will cut your final pay-out by up to 15%!
You don’t have these issues with a new generation RA. You are not locked in, you can cancel or lower your contributions at any time. Or you can take an indefinite contribution holiday. As fees are recovered on an as-and-when basis only, there is no charge for unrecovered costs. You can also avoid brokers with a new generation RA and invest directly with the asset manager.
Costs are an important consideration with any investment. Traditional RAs have a reputation for being very expensive, costing as much as 3% pa, after taking into account investment management, platform, broker and administration fees. The 10X Retirement Annuity is a new generation RA. You are not required to use a broker (you can deal with 10X directly) and you are charged only one investment management fee, at a maximum of 0.90% pa (excl. VAT) of your capital. The fee drops for amounts above R1m.
