What are the tax benefits of a retirement annuity?

Tax-free contributions: The most well-known tax benefit of a retirement annuity is that you do not pay income tax on contributions to your RA(s). This is subject to a maximum cap of 27,5% of income and a rand limit of R350,000 pa. These limits include any contributions made to your workplace pension or provident fund. You will receive this benefit either monthly (if your employer takes your RA contribution into account when deducting PAYE) or in the subsequent year, once you have submitted your tax return and received your refund.

Tax-free returns: A further important retirement annuity tax benefit is that you do not pay tax on the investment returns earned within your RA (ie no tax on interest income, no capital gains tax and no dividend withholding tax). Without the tax drag, your investments grow at a higher rate.

Tax-free lump sum at retirement: At retirement you can take up to one-third of your RA as a lump sum (or the full amount if the RA value is less than R247,500). The first R500,000 of any lump sum you take is not taxed (although this benefit is reduced by any prior withdrawals made from another retirement fund since 1 March 2009).

Lower tax rate on annuity income: At retirement (permitted from age 55 onward), you must use at least two-thirds of your benefit to buy an annuity if the RA value is more than R247,500. The annuity income is subject to income tax per the standard income tax tables. As your RA contribution is deducted at your marginal (highest) tax rate) but your annuity is effectively taxed at your average income, your retirement annuity tax benefit also encompasses the difference between those two tax rates.