Retirement annuity: a savings vehicle with great benefits
20 February 2018
Top up your Retirement Annuity before 28 February 2018 and you could boost your future earnings. For example, if you earn R500 000 and you contribute 15% of that (R75 000) to your retirement annuity, you would qualify for a tax refund of R27 000, which you could reinvest in your annuity.
About a third – 30% to be exact – of working South Africans do not have any formal retirement savings, according to industry research. This statistic jumps to 58% amongst people earning less than R5 000 per month, and as long as this situation continues, a significant reliance on the state’s old age pensions of R1 600 per month will remain, the research warns.
With this staggering reality, asking “how much is enough to retire comfortably” may seem futile for many South Africans especially when also taking into account other research findings that indicate that a shocking nine out of 10 people in the country will not be able to afford to retire comfortably, or at all.
If, however, many understood the benefits of compound interest, investment vehicles such as Retirement Annuities (RAs) can be of huge benefit to many. Not only that, an RA is fairly simple to start contributing to and it also offers significant tax advantages and wealth-accumulation benefits – provided patience is exercised.
Investing in an RA is a long-term exercise with the invested funds starting to work from the day they are put away. As a result, the benefit of compound interest means that growth is earned on growth. Compounding occurs when the returns on an investment are reinvested to generate its own returns, creating a snowball effect where the investment starts growing faster, the longer it is invested. Over 30 years, more than 65% of the value of an RA could come from its compound growth alone.
Although RA’s were introduced largely to cater to the self-employed who were not contributing to any employer funds, anyone can invest in an RA and the minimum investment amounts are generally low. Missing, stopping or reducing a debit order (where this is the chosen form of payment for the policy) will not lead to penalties but the growth of the RA investment will obviously be impacted.
There are various fee structures to choose from, with some RAs offering more flexibility in terms of premium holidays and payment structures.
Evidently, an RA is an ideal long-term savings tool. Not only does SARS help pay for it (through the many tax deduction explained above), but if you contribute more than the limits, the excess contributions can be used to increase the value of any tax-free lump sum you take before or at retirement. The excess contributions can also reduce the taxable portion of the retiree’s living annuity income.
Of course, not everyone can afford to put away up to 27.5% of their taxable income (subject to an annual ceiling of R350 000), however the more money put away, the closer that “retire comfortably” target is. It is never too early to start saving, especially for retirement.
Please do not hesitate to call the Service Centre on 0860 000 005 or your Absa financial adviser, should you require any assistance.
Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.