Looking to invest in a Retirement Annuity? – Here are the Pros and Cons

“What a terrific long-term investment,” says one person. “Not a great idea,” says another.

Ask any two people about investing in a retirement annuity and you will get completely different answers. We wanted to find out for ourselves and decided to weigh up the pros and cons.

Join us as we investigate whether it’s still a good idea to invest your hard-earned bucks into a South African Retirement annuity plan.

The Pros

A portion of your contribution is tax-deductible.

This is the only investment you can take out in your name which is tax-deductible. But tax-deductible does not mean you can contribute as much as you want and end up paying no tax at all.

Here is how it works:

Contributions are limited to 27.50% of your gross remuneration or taxable income. Okay, what does that mean? The calculation is the greater of:

  • The amount of remuneration for PAYE purposes, or
  • Taxable income

Both calculations exclude contributions to retirement funds (i.e. provident or pension fund) and severance benefits and are calculated before considering capital gains.  In other words, let’s say you earn R10 000 a month.

  • 27.5% of R10 000 is R2 750 a month.
  • Now deduct any contributions made to a pension or provident fund.  Imagine you contribute R1 000 a month to a provident fund.
  • R2 750 – R1 000 = R1 750.
  • R1 750 per month is the amount you should invest to enjoy the maximum tax deduction.

Also, remember that the maximum annual contribution allowed for a tax deduction is limited to R350 000. So, if you earn R120 000 a month for instance, then your contribution is limited to R350 000 per annum. You’re welcome to invest as much as you want, but you will never get more than the allowable deduction in that tax year.

Those at the higher marginal tax rates receive the larger tax deductions, but then they also pay the higher taxes.

Growth is tax-free

When it comes to retirement annuities, there is zero tax on the interest you earn, the rental income paid to you, the dividends earned from the companies you invest in, and the capital gains made when you sell.

All other investments get taxed on those types of proceeds every year. All that money that would have gone towards paying tax can now be reinvested towards your retirement.

R500 000 tax-free at retirement

The first half a million Rand paid out to you at retirement is free of any tax

Safe from creditors

None of us plan on getting into trouble financially. If you do though, it’s good to know that your retirement savings are not lost because Retirement Annuities are protected from creditors. Just be careful, SARS is the one creditor you cannot hide from.

Not part of your Estate

The first benefit here is no Executor fees. The Executor of your estate is entitled to charge 3.50% (excluding VAT) against the value of anything falling into your estate. That’s a R35 000 fee on your million Rand investment.

Retirement annuities also do not attract Estate duty at all. That’s a potential 20% to 25% tax saving right there.

The Cons

One-Third in Cash at Retirement

Only one-third can be taken in cash at retirement. The one exception to this rule is if the total value of your retirement annuity is less than R247 500 at retirement, you can take the full amount in cash.

The earliest age at which you can retire.

The earliest age at which you can retire is 55. The only exception is if you become disabled before then. You can also cash in at any time if your fund balance is less than R7 000.

Regulation 28 of the Pension Fund Act

This is a regulation written into the Pension Fund Act and tells you how much you (meaning the people who manage the investment of your RA money) may and may not invest in certain asset classes.

For instance:

  • Equity exposure limited to 75%
  • Offshore exposure limited to 30%
  • Property exposure limited to 25%

Now that sounds all good and well, but should a 20-year-old be limited to a maximum of 75% in equity? Or should the investor be locked in locally when better returns are available offshore?

And while it is not yet law, investment companies are being encouraged to invest in local infrastructure projects. Treasury is proposing that local exposure be limited to 45% and a further 10% across the rest of Africa.

The question is, what prevents the government from forcing you to invest in local infrastructure projects at any point in the future? Do you want that much government control over your retirement annuity?

Not being able to cash in your retirement annuity when you emigrate.

From the 1st of March 2021, your retirement annuity will be locked in for a minimum of three years when financially emigrating from South Africa. You would need to prove that you have been a non-resident for tax purposes for three uninterrupted years before being allowed to surrender your retirement annuity

So, if you were intending to use the money to buy a new home overseas, well, you will have to shelve that idea for at least 3 years.

 A couple of questions you need to ask yourself?

Will you remain in South Africa? Well, then a retirement annuity makes absolute sense. Are you planning on emigrating shortly? Then no, stay away.

The biggest question of all is, are you sick and tired of paying so much income taxes? Then yes, start investing today.

Until next time.

The Wise About Life Team

One Comment

  • Thanks for the advice but do not plan to leave South Africa as yet, and yes I do have a retirement annuity.


Leave a Reply

Your email address will not be published. Required fields are marked *

Be Wise - Find your ideal plan with Stangen

We understand that you want to make wise choices that suit you. Use our cover calculator to easily get an idea of your cover requirements.

Need assistance? We'll call you back.

Why not subscribe?

What can you expect from us? We promise to keep content on this site relevant and useful so that you can make wise money choices.
Every time we knock out another great piece of “stay financially wise” content, we will send you a notification via email.